When the Federal Reserve raises interest rates later this year, the increase is “likely to be gradual,” said chairwoman Janet Yellen Friday in a speech outlining her plans for post-crisis monetary policy.
Yellen’s remarks, delivered at the Federal Reserve Bank of San Francisco where she used to be president, laid out her view of the economy and how the central bank should adjust its policies to a soon-to-be healthy labor market.
After holding short-term interest rates at zero since 2008 and buying trillions in bonds to try to stimulate the economy, the Fed is poised to raise its target for rates in the upcoming months. In doing so, it will influence rates on all credit, from mortgages to credit cards.
At its monetary policy meeting this month, the Fed signaled that the rate hike could come at any meeting after April, depending on whether the unemployment rate is falling and inflation is heading up to the Fed’s 2 percent goal.
Once the central bank does begin to tighten policy, Yellen said Friday, it “could speed up, slow down, pause, or even reverse course” depending on economic and employment growth.
In her speech, Yellen went into detail about how she assesses the strength of the U.S. economic and about her decision-making process when it comes to setting rates.
The economy, she said, is improving, but it is weak in the sense that it should be “booming” given the stimulus it has received from the Fed.
But Yellen also explained why it is likely to be necessary soon to raise rates, even with inflation running below the Fed’s 2 percent target.
Inflation is bound to rise as the economy picks up and unemployment falls, she claimed. For that reason, the actual data doesn’t need to show inflation rising for Yellen to be convinced it will. Rising inflation data “will not be a precondition for me to judge that” a rate hike is warranted.
Falling inflation and inflation expectations, on the other hand, could delay the decision to raise rates above zero.
Yellen also laid out several reasons why the Fed might not want to raise rates too early, including the possibility that the U.S. is in a situation similar to Japan’s experience over the past two decades — with long-running deflation and low market interest rates.
She also presented the opposite view, namely that waiting too long could inflate stock bubbles or lead to runaway inflation.
