Fed Chair Cites Slow Productivity Growth in Reluctance to Raise Interest Rates

Federal Reserve Chair Janet Yellen in her testimony to Congress on Wednesday said the Fed would be using "patience" on deciding when to increase interest rates. Yellen was cautious about citing any particular date for the increase, citing slow productivity growth as one of the reasons for the delay.

"There has been important progress," Yellen said. "However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective."

Yellen stressed consideration for an increase will not happened for at least the next couple of Federal Open Market Committee meetings, but believes if economic growth continues, the committee will begin to consider a change on a meeting-to-meeting basis. Failure to meet the target inflation is also a key factor for the slow move on rates.

"We think that inflation is going to move lower before it moves higher for exactly the reasons you cited: import prices have been falling in part because of the dollar, and declining oil prices have had a very major influence," she said in her testimony. "We do think that the effects of these factors will be transitory and, especially with an improving labor market, that we expect inflation over the medium-term, the next two or three years, to move up to our 2 percent target."

According to David Crowe, chief economist for the National Association of Home Builders, the lag in decision making could have little to no effect on the housing market.

"Short-term rate increases will have little impact on the housing market. Mortgage rates are more likely to be set by long-term investor demand and the general health of the economy," he said. "Since the start of the housing recovery, the price of credit has been much less important to housing than the access to credit. High barriers to mortgage qualification are the biggest limit to housing demand."

While oil prices and unemployment rates have dropped, the housing industry has yet to fully recover from the financial crisis, which could be another reason for Yellen’s measured response on how to move forward.

"I share her continued concern that the housing market has not performed well in this recovery," Crowe said. "She and the Fed seem comfortable that it will improve, as am I, but their focus on the housing market is proof of how important housing recovery is to the entire economy."