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Yellen expects Fed to raise key short-term interest rate this year

If the economy improves as expected, the Fed will raise its key interest rate this year, Yellen said.

Federal Reserve Chairwoman Janet L. Yellen said Friday that she expected the central bank to increase its benchmark short-term interest rate this year if the economy continues to improve.

It was her clearest signal yet of when the Fed would raise the so-called federal funds rate for the first time since 2006. The Fed has held the rate near zero percent since late 2008 in an attempt to boost economic growth and hiring. With the economy improving, Fed policymakers have indicated they could start raising the rate as soon as June.

But recent weak economic data have led many analysts to predict the Fed would not raise the rate until at least September — and maybe not until next year.

And minutes of the Fed's last meeting, in April, showed many policymakers “thought it unlikely” that economic data available by June would be strong enough to warrant a rate hike.

In a speech Friday in Providence, R.I., Yellen said that an economic slowdown in the first three months of 2015 appeared to be “largely the result of a variety of transitory factors,” including unusually bad winter weather and a dispute at West Coast ports. Growth should pick up to a moderate pace as the year progresses, she said.

“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 federal funds rate target and begin the process of normalizing monetary policy,” Yellen said.

But she said the labor market would need to continue improving and inflation would have to show signs of picking up.

The Fed wants prices to increase 2% annually. But a Labor Department report Friday said the consumer price index declined 0.2% in the 12 months ended April 30.

Recent low inflation has been caused largely by the sharp decline in oil prices that began last year. So-called core inflation, which excludes volatile energy and food prices, was 0.3% in April, the largest rise since January 2013. For the 12-month period through April 30, core inflation was 1.8%.

“Inflation has been held down by the continued economic weakness during the slow recovery and, more recently, by lower prices of imported goods as well as the fall in oil prices,” Yellen said.

But with oil prices no longer declining, she said, she and her Fed colleagues believe that inflation “will move up to 2% as the economy strengthens further and as other temporary factors weighing on inflation recede.”

In a March 27 speech, Yellen said a federal funds rate increase “may well be warranted later this year” if the economy kept improving. And in a March 18 news conference she said most of her Fed colleagues “are anticipating that it will be appropriate to begin” to raise the rate “sometime this year.”

Yellen went further Friday in signaling her expectation of the timing of the first rate hike. An improving labor market had brought the economy closer to maximum employment and “home prices have moved up appreciably in many areas of the country,” she said.

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Copyright © 2016, Los Angeles Times

UPDATES

5:40 p.m.: This article was updated with changes throughout.

This article was first published at 11:07 a.m.

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