Federal Reserve Chairwoman Janet Yellen reaffirmed Friday that she believes it will be appropriate to raise short-term interest rates this year, but she acknowledged that unemployment is still not back to normal and that there are some signs that economic growth has slowed.
“We are not there yet” on unemployment, Yellen said in text prepared for a speech in Providence, R.I., at an event sponsored by the Greater Providence Chamber of Commerce.
Nevertheless, later in her address, Yellen indicated that she expects growth to pick up, despite weak readings on U.S. gross domestic product and other economic data.
“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise” the Fed’s target for short-term interest rates, Yellen said.
The Fed has held its target rate near zero since late 2008 in an effort to stimulate the economy.
Most recently, the Fed’s monetary policy committee has said it will raise rates after further employment growth and when it is “reasonably confident” that inflation will rise toward its 2 percent goal.
At least two members of the committee believe that those conditions will not be met until at least 2016, based on economic data.
Yellen acknowledged that the labor market is weaker than it might appear. Although the unemployment rate, at 5.4 percent in April, is near the level that the Fed sees as consistent with a healthy, it doesn’t tell the whole story, Yellen argued. A significant number of people would like to work but gave up the job hunt because they got discouraged. As a result, they fell out of the calculation of the official unemployment rate.
But even though there’s still hidden unemployment and signs of economic weakness, Yellen reaffirmed that the Fed is likely to move to tighten monetary policy this year. The Fed has to act based on a forecast, she noted, because of the “substantial lags” in the effects of interest rate movements.
And she does expect the economy to pick up. The recent weakness in economic data can be attributed in part to “transitory factors,” she said, such as unusually harsh winter weather or the slowdown at West Coast ports because of labor protests. Yellen acknowledged, however, that her forecast could be “markedly” wrong.
Once the Fed moves to raise rates, it will only do so gradually, Yellen said. It will be “several years” before they are back to normal levels.
