Fed unlikely to raise interest rates anytime soon: Yellen
23 Aug 2014
The US Federal Reserve will not raise its policy interest rate anytime in the near future despite a steady drop in unemployment rate since the picture of the job narket continues to be hazy and has become harder to assess, Fed chief Janet Yellen said.
Yellen offered no clarity to investors on the timing of the first interest rate increase, which most economists expect by mid-2015. Instead, she said the picture is too hazy and despite the recent gains, employment levels could still fall.
Investors had been anticipating a firmer signal from Yellen about whether an improving economy might prompt the Fed to act sooner than expected to start raising rates. She instead offered further uncertainty.
Yellen suggested the job market has become harder to assess and may reflect persistent weakness. The job market is characterized by many people who were jobless for more than six months, millions working part time who want full-time jobs and weak pay growth.
The Federal Open Markets Committee had, in December 2012, modified its forward guidance for the federal funds rate, stating that "as long as the unemployment rate remains above 6.5 per cent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 per cent longer-run goal, and longer-term inflation expectations continue to be well anchored," the committee would not even consider raising the federal funds rate above the 0 to 0.25 per cent range.
This "threshold based" forward guidance was deemed appropriate under conditions in which inflation was subdued and the economy remained unambiguously far from maximum employment.
Earlier this year, however, with the unemployment rate declining faster than had been anticipated and nearing the 6.5 per cent threshold, the FOMC recast its forward guidance, stating that "in determining how long to maintain the current 0 to 1/4 per cent target range for the federal funds rate, the committee would assess progress - both realised and expected - toward its objectives of maximum employment and 2 per cent inflation."
But, Yellen said, ''as the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve's dual mandate.''
Indeed, in its 2012 statement on longer-run goals and monetary policy strategy, the FOMC explicitly recognized that factors determining maximum employment "may change over time and may not be directly measurable," and that assessments of the level of maximum employment "are necessarily uncertain and subject to revision."
She said the FOMC's view is that policy decisions will not be based on any single indicator, but will instead take into account a wide range of information on the labor market, as well as inflation and financial developments.
Yellen said that for now, a broad assessment of the job market suggests that the economy still needs Fed support in the form of ultra-low rates and that inflation has yet to become a concern.
"The assessment of labour market slack is rarely simple and has been especially challenging recently," Yellen said at the conference, which the Federal Reserve Bank of Kansas City sponsors each year at a lodge beside the majestic Grand Tetons.
Yellen invoked language the Fed has used that record-low short-term rates will likely remain appropriate for a "considerable time" after the Fed stops buying bonds to keep long-term rates down. The bond buying is set to end this fall.
Yellen stressed that the Fed's rate decisions will be dictated by the economy's performance. "Monetary policy is not on a preset course," she added.
