Fed chief stresses flexibility on timing of interest rate hike
Federal Reserve Chairwoman Janet L. Yellen greased the wheels for an eventual interest rate hike, but she made clear that she was keeping her options open on the timing of any such move.
Appearing for the first time before the new Republican-controlled Senate, Yellen laid out the path Tuesday for a change in monetary policy as she highlighted the “considerable progress” achieved in the labor market recovery — a precondition of a Fed rate increase.
Yet Yellen also gave plenty of reasons for wanting flexibility. She said that “too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective.”
And in a response to a lawmaker’s question, she said that the central bank would not want to act too quickly and “risk undermining a recovery that is really just taking hold and is really succeeding.”
Investors liked what they heard, apparently concluding that Yellen was in no hurry to raise rates. The Dow Jones industrial average and the broader S&P 500 closed at record highs. The 10-year Treasury yield dipped below 2%.
At first, it looked as if Yellen, a Democrat who began her second year as Fed chief this month, might face contentious questioning. Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking Committee, opened the session with remarks about the Fed that included “I and many of my colleagues have been calling for greater accountability and more effective disclosure for years.”
But it all turned fairly cordial. For instance, on the longtime proposed bill to audit the Fed — a cause that harangued Yellen’s predecessor, Ben S. Bernanke — Yellen even found a measure of bipartisan support.
After hearing Yellen’s answers to several questions about the Fed’s assets and lending disclosures, Sen. Bob Corker (R-Tenn.) sounded satisfied and said that “it’s obvious to me that the audit-the-Fed effort is to not address auditing the Fed, because the Fed is audited.”
To him, Corker said, “it’s an attempt to allow Congress to be able to put pressure on Fed members relative to monetary policy, and I would just advocate that that would not be a particularly good idea.”
Yellen responded, “I strongly agree.”
Moments earlier, Yellen told lawmakers she was “strongly opposed” to such proposed legislation, saying that it would politicize monetary policy and bring strong political pressure to bear on the independent central bank.
Lawmakers also probed Yellen for her take on the sensitive issue of exchange rates.
Congressional Democrats as well as some Republicans have sought to include an anti-currency manipulation provision in the Asia-Pacific free trade deal that is being championed by the Obama administration and is in the final stages of negotiations.
Yellen said that such an inclusion would be problematic. Sanctions for alleged currency manipulation could indirectly “hamper or even hobble monetary policy,” she said, as central-bank policies aimed legitimately at supporting a domestic economy can affect currency values.
Analysts said Yellen’s main objective before the committee was to smooth the transition for the Fed as it ends years of near-zero interest rates and moves into a mode of returning to normal rates.
In particular, Yellen sought to clarify the Fed’s so-called forward guidance language so financial markets would not bank on certain assumptions that could lead to abrupt reactions.
In their last two meetings, in December and January, policymakers said in their statement that they could be “patient” in beginning to raise the Fed’s benchmark short-term interest rate. Yellen has said that means the Fed would not move for at least two policy meetings, making June the earliest for a rate hike.
But financial markets have come to believe that if the Fed dropped the word “patient” at its next meeting in March, it would automatically bring a rate hike in June, said Dean Maki, chief economist at Point72 Asset Management, an investment firm based in Stamford, Conn.
Yellen, however, emphasized that that wouldn’t necessarily happen; rather, it would be on a “meeting-by-meeting basis” for Fed officials to decide as they evaluate the latest economic and financial data.
The point of Yellen’s clarification is that “it makes it less momentous when the Fed drops the ‘patient’ language,” Maki said. “It’s more not giving that assurance rather than saying we’re going to move in short order. This gives the Fed flexibility.”
Yellen wants her options open for good reason, said Diane Swonk, chief economist at Mesirow Financial in Chicago. Although the Fed chief painted an upbeat picture of the economy, Swonk pointed to uncertainties, including the economic effects of the frigid winter weather and the work stoppages at West Coast ports.
The Fed also is looking at mixed signals on the inflation outlook.
Significantly, Yellen said that before raising rates, Fed officials want to feel confident that inflation will move toward the central bank’s 2% target over the medium term, generally thought of as two to three years down the road.
Inflation has been running unusually low in recent months, in part because of the steep drop in oil prices since last summer. That is a concern because of the threat of deflation, a debilitating condition of falling prices and wages that many consider even more difficult to control than inflation.
Yellen also voiced concerns about the still-sluggish housing market and the risks to the American economy from weaker overseas growth, including slowing in China and protracted problems in Europe. She sounded optimistic, however, about the policy response to challenges abroad and what she described as a boost from the decline in world oil prices.
The Fed wants to promote a long economic expansion, Swonk said, and “the fact that we’re at a pivotal point, the Fed’s not going to squander it.”
Yellen’s testimony and exchange with senators Tuesday were part of the Fed’s semi-annual report to Congress on the economy and monetary policy outlook. She will give the same prepared statement Wednesday to the House Financial Services Committee before taking questions from lawmakers.
