Federal Reserve Chairwoman Janet Yellen sought to
lay the groundwork for interest-rate increases later this year and sounded
positive notes on the economy’s performance in the past six months. If the
economy keeps improving as the Fed anticipates, she added, the central bank will
at some point begin considering an increase in the target range for the federal
funds rate on a meeting-by-meeting basis.
With that warning, the Fed leader subtly shifted the Fed’s
public discussion of the outlook for rates, away from assurances that rates
would stay low and toward a discussion of when and how fast they would move up.
Many Fed officials have said recently they would like to have the option to
raise rates at midyear, though they’re not yet sure they will actually move by
An important section of her testimony sought to manage the
market’s expectations as the Fed looks toward altering its rate guidance. The
Fed’s next policy meeting is March 17-18 and officials are worried that when
they remove the “patient” reference from their policy statement, investors will
believe rate increases are imminent. However, she added that a change in the
guidance would put rate increases on the table for discussion at coming policy
Ms. Yellen laid out inflation developments in the U.S. as a
key to the decision on when rates would rise. Inflation has been running below
the central bank’s 2% objective for nearly three years and is likely to continue
on that path given the recent drop in oil prices. While a stronger job market
suggests rate ought to be rising, low inflation gives officials pause.
Fed officials are likely to be hearterned by the market’s
response to Ms. Yellen’s subtle warnings that interest rates could be on the
rise. Stocks rose modestly after her prepared remarks were released and
continued rising during her testimony. Fed officials have been worried that the
mere removal of low-rate assurances could spark market turbulence, pushing
stocks down and bond yields much higher, as happened in 2012 when the central
bank considered ending a bond-purchase program.
During the question-and-answer session, Ms. Yellen spoke
strongly against a proposal by Sen. Rand Paul (R., Ky.) that could
subject the Fed’s monetary-policy decisions to investigations by the Government
Accountability Office. She said it would politicize Fed decision-making and
argued the Fed wouldn’t have had the courage to raise interest rates in the
early 1980s to beat back inflation if it had been subject to such reviews.
The Fed is navigating a complex economic backdrop. A variety
of job-market indicators that Ms. Yellen watches closely are improving. The
jobless rate, at 5.7%, is approaching low levels where many Fed officials
believe it could settle in for the long run. Payroll growth averaged 280,000 a
month in the second half of 2014. Long-term unemployment has dropped and fewer
workers are reporting they can only find part-time work.
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