Wednesday, February 25, 2015

When Will The Fed Raise Interest Rates?


Federal Reserve Chair Janet Yellen navigated the tricky job of managing expectations on Tuesday in her first public comments on interest rate policy in more than two months.


She wanted the world to know the Fed isn't ready yet to raise rates from record lows. The job market is still healing, and inflation is too low, she said. At the same time, Yellen signaled that the Fed is moving closer to a rate hike by sketching the steps the central bank would take when it deemed the time was right.


In delivering the Fed's semiannual economic report before the Senate Banking Committee, Yellen tried to balance the public's thirst for information on the Fed's future plans, while giving the central bank as much flexibility as possible to tweak monetary policy on its own terms.


The Fed has two mandates: maximum employment and price stability. The dilemma Yellen faces now is that the two measures are heading in opposite directions.


Yellen told lawmakers that the U.S. economy is making steady progress toward what the Fed defines as "maximum employment" — an unemployment rate between 5.2 percent and 5.5 percent. The jobless rate in January stood at 5.7 percent, down from a high of 10 percent in late 2009. Yellen, however, noted that the labor market had not totally healed, in large part because wage growth has been weak.


"Considerable progress has been achieved in the recovery of the labor market, though room for improvement remains," Yellen said.


Inflation is a thornier issue. The Fed's goal is for inflation to hit 2 percent annually. But for more than two years, inflation has been rising well below that level. It has retreated further from the Fed's target in recent months due to the stronger dollar and lower oil prices.


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After Yellen's remarks, private economists weighed in with their forecasts. Many said a rate hike looks likely in June. Others said September.


"The Fed is trying to manage a difficult situation in dealing with the uncertainty surrounding the economic outlook," said Paul Edelstein, director of financial services at Global Insight. "Yellen sees a path to rate hikes but knows the value of maintaining discretion."


Meanwhile, investors liked what they heard from Yellen, who reiterated that the Fed would remain "patient" about raising interest rates as it waits for the economy to improve further. The Dow Jones industrial average and the S&P 500 closed at record highs, beating the marks they set Friday.


Yellen sought to explain how the Fed would begin raising rates and what it would do to prepare financial markets. Its continuing use of the word "patient" means a rate hike is unlikely for at least the next two meetings, she said.


And even when the Fed drops the word "patient," it will not necessarily translate to an imminent rate increase, she said. Rather, it will indicate that the Fed can start considering rate hikes on a "meeting-by-meeting basis."


After keeping its key short-term rate near zero for six years, the Fed must now maneuver a difficult transition from keeping rates super low for a prolonged period to beginning to raise rates without triggering a volatile reaction in financial markets that have grown used to ultra-low rates.


During more than two hours of testimony, Yellen stuck closely to the views revealed in the minutes of the Fed's Jan. 27-28 meeting, in which Fed officials recognized that the economy was finally gaining momentum nearly six years after the country began to emerge from the worst recession since the 1930s. Yet it signaled that it was in no hurry to raise interest rates, judging that the risks of raising rates too soon and derailing the recovery outweighed the potential dangers of waiting too long.


But Republicans, who now control Congress, have complained that the Fed's cautious approach is fueling the risk that inflation could accelerate to worrisome levels in the future. That could force the Fed to move more quickly to raise rates and increase the threat of destabilizing markets.


Senate Banking Committee Chairman Richard Shelby, R-Alabama, told Yellen that a prolonged delay in raising rates "could lead to a more painful correction down the road."


But Democrats cautioned Yellen about hiking rates too quickly when the labor market has yet to fully heal. The Fed should not raise rates "until wages are back on a steady upward trend," Sen. Charles Schumer, D-New York, told Yellen.


Yellen also was questioned about a bill with wide GOP support in the Senate and House that would increase congressional oversight of the Fed by granting the Government Accountability Office the power to audit the central bank's decisions on monetary policy. Yellen and other Fed officials have opposed the proposal, saying it could compromise the Fed's independence.


The bill would "politicize monetary policy and bring ... political pressures to bear on the Fed," Yellen said, repeating her staunch opposition to the bill.


Yellen highlighted other risks to the U.S. economy, including a variety of foreign challenges from a slowing Chinese economy to further economic weakness in Europe. But she said that aggressive efforts by the European Central Bank to boost growth should boost growth in the euro area.


Yellen is scheduled to testify today before the House Financial Services Committee.


By:Martin Crutsinger

(AP:WASHINGTON)


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