Yellen Says She Still Expects Rate Increase This Year

Are Yellen’s 2015 Rate Rise Comments Believable?
  • Chair herself sees a 2015 liftoff from near-zero rates
  • Yellen says Fed can't be sure how quickly headwinds will fade

Federal Reserve Chair Janet Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic “surprises” could lead them to change that plan.

“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen said during a speech Thursday in Amherst, Massachusetts. “But if the economy surprises us, our judgments about appropriate monetary policy will change.”

Yellen, 69, spoke a week after the Federal Open Market Committee left its benchmark federal funds target near zero, saying "recent global economic and financial developments" might damp growth and inflation in the U.S. Concerns over a slowdown in China following a surprise Aug. 11 devaluation of the yuan triggered turmoil in financial markets and raised questions about the outlook for the global economy.

While “there wasn’t anything significant enough that changed in one week for her to give us a different take,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, Yellen “finally acknowledges that she, specifically, does believe that a rate hike is appropriate this year.”

Porcelli expects a December increase, but thinks there’s a high hurdle to moving this year.

Slower demand from China, where growth is projected to drop below 7 percent this year, has helped push down commodity prices, sapping already low inflation in the U.S. The Fed’s preferred gauge of price pressures rose 0.3 percent in the year through July and has been under its 2 percent target since April 2008.

Fading Headwinds

“We cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade,” Yellen said in her remarks Thursday. “Recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further.”

The Fed has been forced to weigh headwinds against signs of continued growth in the domestic economy. U.S. employers have added 1.7 million jobs to payrolls this year, pushing unemployment down to 5.1 percent in August, its lowest in more than seven years.

“On balance the economy is no longer far away from full employment,” Yellen said in her speech. “In contrast, inflation has continued to run below the Committee’s objective over the past several years, and over the past 12 months it has been essentially zero.”

Yellen highlighted that inflation expectations have remained well-anchored, but said that the central bank shouldn’t take it for granted that they will stay that way. She said she thinks “temporary effects” of falling energy and non-energy import prices are the driver behind the tepid inflation, and expects price pressures to rebound barring further decline in crude oil prices and further appreciation in the dollar.

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