WASHINGTON: The US central bank is close to achieving its inflation and employment goals, but any policy moves will depend on how the economy evolves, Federal Reserve Chair Janet Yellen said Wednesday.
Speaking just two days before President-elect Donald Trump takes office, perhaps the most remarkable thing about the speech was that Yellen twice emphasized that the Fed is nonpartisan and designed to be isolated from political pressures.
“At the Fed, we too are nonpartisan and focused squarely on the public interest,” Yellen told the Commonwealth Club in San Francisco. “We strive to conduct our deliberations impartially and base our decisions on factual evidence and objective analysis.”
Trump has criticized both the Fed and Yellen’s handling of monetary policy, raising concerns that his administration and a Republican-controlled Congress might implement legislation to change how the central bank operates.
The Fed’s structure as designed “intentionally insulates us from short-term political pressures. so we can focus on what’s best for the American economy in the longer run,” Yellen said in her prepared remarks, which at times sounded almost like a plea.
“I promise you, with the sometimes imperfect information and evidence we have available, we will do just that by making the best decisions we can, as objectively as we can.”
And while Fed chiefs typically have regular contact with administration officials to exchange views—including her weekly breakfast with outgoing Treasury Secretary Jack Lew—and they have “definitely respected the independence of the Fed.”
“I have never had a situation where a member of the administration has tried in any way to pressure me for any reason about the stance monetary policy,” she said in response to a question following her speech.
Fed policy working
The policy decisions by the Fed appear to be working, since “the economy is near maximum employment and inflation is moving toward our goal” of 2 percent.
The unemployment rate is less than five percent, and the economy has added about 15.5 million new jobs, she said, although wage growth only recently has started to pick up.
That improvement and the Fed’s confidence in the recovery prompted central bankers to raise the key benchmark interest rate last month for only the second time in a decade.
But Yellen stressed that she cannot say for sure when the next rate hike will come.
“The simple truth is, I can’t tell you because it will depend on how the economy actually evolves over coming months,” she said.
“What I can tell you is what we expect—along with a very large caveat that our interest rate expectations will change as our outlook for the economy changes.”
One of the things the Fed will review are any policy changes from the new administration, as Trump has promised tax cuts, deregulation and huge spending on infrastructure.
“We are at a point where many economic policy changes are under consideration. We will closely follow those, and… factor those into outlook,” Yellen said in response to an audience question.
Policymakers last month indicated they expect three rate hikes this year. And Yellen said they will continue “to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to” 3 percent.
But she noted that the Fed wants to maintain stimulus in the economy even as it gradually raises rates.
“Our foot remains on the pedal in part because we want to make sure the economic expansion remains strong enough to withstand an unexpected shock.”
Still, she warned that “monetary policy cannot, by itself, create a healthy economy,” and other policies will be needed to boost productivity which is key to improving living standards.