WASHINGTON: Janet Yellen said Tuesday that the Federal Reserve can still be patient before raising interest rates, even as she prepared the ground for an increase as early as mid-year.
With the markets’ guessing game over a rise in the federal funds rate intensifying, the Fed chair told a US Senate panel that the central bank was deep in preparation for the move after keeping the rate at zero for more than six years.
But she also stressed that the US labor market still showed cyclical weakness and inflation continued to fall.
And she said that frailties in China and Europe posed a risk for the US economy, supporting the need to keep the extraordinarily loose monetary policy in place a bit longer.
“A high degree of policy accommodation remains appropriate,” Yellen told the Senate Banking Committee.
Inflation is still falling, and despite the unemployment rate having fallen to 5.7 percent, the persistent lack of wage gains for average workers suggests the jobs market remains slack, Yellen noted.
“Real wages tend to rise more rapidly in a strong labor market, so I interpret part of that phenomenon as a sign that the labor market is not yet fully recovered,” she said.
“We have further to go and we want to promote full recovery.”
Thus the Federal Open Market Committee (FOMC), the Fed’s policy board, still “considers it unlikely” that it will need to hike the federal funds rate “for at least the next couple of meetings.”
The FOMC calendar has upcoming meetings in March and April, leaving the earliest time for a hike on Yellen’s calendar the June 16-17 meeting.
The timing of the first increase in the post-recession era has kept the financial world on edge.
The prospect of tighter US monetary policy has already sparked turbulence in currency and capital markets abroad, especially in more vulnerable emerging-market economies.
As much as the Fed wants to take the step, Yellen has to both weigh the strength of the US economy to withstand the slowing effect of tighter money and also the global economy’s tolerance for the volatility that could accompany tightening.
The Fed particularly wants to be sure that higher rates do not stall the growth in hiring by US businesses.
Yet it is also wary that the longer it keeps rate extremely low, the greater the chance that speculative bubbles will build up and, separately, the conditions build for a burst of inflation.
Yellen made it clear that the Fed was deep in planning for the move. She said the US economy generally continues to grow fast enough to bring down unemployment, and the Fed expects inflation will return back to normal over the medium term — meeting the Fed’s own conditions for a rate increase.
Yellen said the fall in oil prices, on the whole, “is likely to be a significant overall plus” for the US economy.
On the other hand, she revealed worries about economic challenges abroad. In China, growth could slow more than Beijing’s leaders currently expect. In the euro area, the recovery remains slow, and inflation was very low, heightening the downside risks to growth.
Analysts said that Yellen’s testimony suggested the economy can handle a rate increase.
“There is no doubt that from a fundamental perspective the US economy is more than ready to withstand some monetary policy normalization. But when the good data will finally be good enough to convince also the more hesitant FOMC members has to be seen,” said Harm Bandholz of UniCredit.
Markets took Yellen’s Senate testimony — which will be followed with a House session on Wednesday — in stride.
Stocks were modestly higher, with both the Dow and the S&P 500 rising to new records. The dollar was barely changed at $1.1342 per euro.