Janet Yellen on Tuesday tried to rule out any surprises about the Federal Reserve’s moves in coming months to raise short-term interest rates from zero.
Testifying on monetary policy before a U.S. Senate panel, Yellen suggested that the central bank would painstakingly spell out every step before ultimately raising rates, leaving little room for investors to be surprised about the timing.
At its January meeting, the Fed’s monetary policy committee said it would be “patient” in deciding to lift the target short-term interest rate from near zero, a move intended to have ripple effects on the cost of credit throughout the economy, on everything from home loans to credit cards.
On Tuesday, Yellen said the Fed would change its language before raising rates, getting rid of the promise to be “patient.”
Presumably, a rate increase could come at any meeting after that shift in language. It would be the first rate hike since late 2008, when the Fed drove short-term rates to zero in an effort to stimulate the economy.
Even then, however, Yellen said the Fed will move cautiously. It’s “important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings,” she told senators Tuesday.
Afterward, the Fed will raise rates slowly, Yellen said, to provide support to an economy still damaged by the 2008 financial crisis. Historically, short-term interest rates have ranged from the mid-single digits to as high as 20 percent during times of high inflation.
Overall, Yellen sounded generally positive about the economy, suggesting that recent job gains hint at further strength, “though room for further improvement remains.”
While inflation has been running well below the Fed’s 2 percent goal, Yellen expressed confidence it would rise back in line with the Fed’s projections as the labor market tightened, pushing up wages.
Part of the drag on price gains has been falling energy prices. Low oil prices will hurt U.S. domestic production in the short-term, Yellen acknowledged, but overall cheap oil “will likely be a significant overall plus,” she said.
The bigger concern for the U.S., Yellen testified, may stem from overseas.
“In China, economic growth could slow more than anticipated” because of fragility in the financial system and reliance on foreign exports and investment, Yellen said. She also cited the possibility of growth slowing in the euro zone.
