Fed Likely to Raise Rates this Year


The Federal Reserve Chair Janet Yellen said she expects the Fed to raise interest rates at some point later this year but stressed the labour market hasn’t fully recovered yet while inflation remains low.

Excerpts from the speech by Chair Janet L. Yellen at the City Club of Cleveland, Cleveland, Ohio:

As I noted, the national unemployment rate has declined markedly during the economic recovery. But it is my judgment that the lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labor market--in other words, how far away we are from a full-employment economy. In assessing labor market slack, we try to distinguish between the effects of cyclical fluctuations in the economy and the influences of longer-term structural changes, such as the aging of the workforce and other demographic trends. Cyclical and structural factors both have affected a number of measures of labor market outcomes that bear on our assessment of slack, including labor force participation (that is, how many people are working or are actively looking for work), the number of people working part time who would rather work full time, the pace of hiring, and the rate at which people are quitting jobs.

While the labor market has moved closer to the FOMC's mandated goal of maximum employment, less progress has been made in moving inflation close to the FOMC's longer-run objective of 2 percent, which the Committee considers to be consistent with our mandated goal of price stability. Overall consumer price inflation has been close to zero over the past year, in large part because the big drop in crude oil prices since last summer has pushed down prices for gasoline and other consumer energy products. Price inflation excluding the volatile categories of energy and food prices, or so-called core inflation, is often a better indicator of future overall inflation. But it too is running below our 2 percent objective and has been over most of the recovery. The recent low level of core inflation--1.2 percent over the past 12 months--partly reflects the appreciation of the foreign exchange value of the U.S. dollar during the second half of last year, as global financial markets seemed to judge that our economy was relatively stronger than those of many of our trading partners. The stronger dollar has pushed down the prices of imported goods, and that, in turn, has put downward pressure on core inflation. In addition, the plunge in oil prices may have had some indirect effects in holding down the prices of non-energy items in core inflation, as producers passed on to their customers some of the cost savings from lower energy prices. In all, however, these downward pressures seem to be abating, and the effects of these transitory factors are expected to fall out of measures of inflation by early next year.

My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting. Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years.

Fed Likely to Raise Rates this Year


Fed | Joana Taborda | joana.taborda@tradingeconomics.com
7/10/2015 6:13:51 PM