WASHINGTON: US Federal Reserve Chair Janet Yellen said Tuesday that central bankers believe the surprisingly low inflation in the past year is only temporary, but she acknowledged they may have “misjudged” the situation.
In her first comments since the Fed last week decided to keep the benchmark interest rate on hold, Yellen again said gradual rate hikes will be appropriate, but she warned against “moving too gradually” and risk fueling inflation.
The economic outlook is beset by “significant uncertainties,” so moving too quickly to raise rates — which the Fed has done twice this year and four times since December 2015 — “risks overadjusting policy to head off projected developments that may not come to pass,” she told the National Association of Business Economists in Cleveland.
With unemployment already at a very low 4.4 percent, if rates fail to keep pace it could cause the labor market to overheat and risk “creating an inflationary problem down the road,” she warned.
Yellen and her Fed colleagues have long argued that inflation, which recently has retreated further from the central bank’s two percent target, is being held back by transitory factors, and should gradually move up in the next two years.
But she acknowledged that they “may have misjudged the strength of the labor market … or even the fundamental forces driving inflation.”
Policymakers will need to “stay alert” as more data comes in that could alter their assessments.
As it is, economists see an increasing likelihood the Fed will raise rates in December for a third time this year.