- Fed chair signals gradual tightening so labor market can heal
- Argues for running economy hot to drive jobless rate lower
Federal Reserve Chair Janet Yellen said she is ready to raise interest rates this year and intends to let the labor market run hot for a time to heal the lingering scars of the worst recession since the Great Depression.
Yellen placed herself squarely in the camp of those Federal Open Market Committee officials who favor raising rates in 2015. “Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year,” she said Thursday in a speech in Amherst, Massachusetts.
Yellen, 69, felt unwell due to dehydration toward the end of her long speech and briefly sought medical attention after the remarks, Fed spokeswoman Michelle Smith said in an e-mailed statement. But the Fed chair was fine and able to resume her schedule, Smith said.
In her speech, Yellen laid out the rationale for gradual Fed tightening aimed at assuring that more Americans can find the jobs they want.
“She’s conceding liftoff, but defending gradualism,” said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC in New York, who expects a December rate rise. “This idea of trying to nurse the supply side of the economy back to health -- that’s a very dovish theme.”
U.S. central bankers left the benchmark policy rate unchanged last week amid concerns that economic and financial turmoil could slow growth and push them further away from their inflation goal. Fed officials have missed their 2 percent inflation target for more than 3 years, partly due to slumping energy costs and a stronger dollar, which lowers import prices.
Yellen said there are still people seeking full-time work who could be pulled back into the labor force if the jobless level fell further. She noted that “may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent.”
“She wants to get to where we are recouping what we lost” in the recession, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “She knows as well as anyone what long expansions with a little overshooting can do to living standards.”
Yellen expressed confidence that a significant portion of the inflation undershoot will wash out with time as the effects of energy and import prices fade, while warning that “a persistent failure to keep inflation” from falling too low or rising too high could tamper with the hard-won stability of public expectations about prices.
Taking a line from the Fed statement last week, the Fed chair said she needed to see three things to be “reasonably confident” that inflation will return to 2 percent “over the next few years” and begin hiking rates this year: Solid economic growth, long-term inflation expectations remaining near their levels from before the recession, and “further gains in resource utilization,” which means in part lower rates of unemployment.
Yellen didn’t describe her own forecast for the benchmark lending rate next year. The median FOMC projection, updated at the FOMC meeting last week, is for four quarter-percentage-point hikes next year, in addition to one quarter-percentage-point move in 2015.
She did, however, lay out a program to push the labor market to even lower rates of unemployment to pull more people back in to jobs, and perhaps even prompt employers to hire more full-time workers.
“Further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment,” the Fed chair said. The FOMC estimated full employment at 4.9 percent last week, only slightly below the 5.1 percent rate in August.
“Attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring,” Yellen said. “Firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions.”
A hot labor market might help reverse some of the “significant” damage to people’s participation in the labor force, she said, “thereby improving Americans’ standard of living.”
Those comments may begin to form what investors have been seeking for weeks -- some kind of described strategy to get inflation higher through lower unemployment rates.
“She wants to explore the fringe of how low unemployment can go to bring back some of that participation in the labor force,” said Laura Rosner, U.S. economist at BNP Paribas in New York. “This was a strategy speech. She supports a more prudent approach of starting earlier and going slower.”