Federal Reserve Chair Janet Yellen confirmed in speech held today at the Providence Chamber of Commerce in Providence, Rhode Island, that interest rates will likely increase later this year due to the gradual improvement in the economy.
“Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy,” Yellen said.
In her speech, Yellen discusses the condition of the improving, but still wavering, economy and says that if the it improves as expected, she believes it will be a good time for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.
“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy,” Yellen said. “To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2% over the medium term.”
She also talks about employment rates, consumer price inflation, and the housing crash. She noted that these factors affect the economy overall and even though it is improving, there is still more work to be done. She adds that households are seeing the benefits of improving jobs situations, consumer confidence has been solid, and the drop in oil prices encouraged household purchasing power.
“The housing crash left many households with less wealth and higher debt, weighing on consumer spending, Yeller said. “Many homeowners lost their homes, and many more ended up "underwater," owing more on their mortgages than their homes were worth. Economists have noted that areas of the country that saw a larger boom and bust in housing have subsequently fared worse economically than other areas of the country.”
Residential construction activity remains low, despite the recovery in home prices and home sales, Yellen says. She noted the ongoing issues with mortgage credit, a weakening job market, and slow wage gains seem to have made many people double-up on housing, and many young adults live with their parents.
“Population growth is creating a need for more housing, whether to rent or to own, and I do expect that continuing job and wage gains will encourage more people to form new households, Yellen said. “Nevertheless, activity in the housing sector is likely to improve only gradually.”
Yellen added that although she believes the Fed will raise rates, ultimately, their decision will be dependent upon new economic data and improvements.
“We have no intention of embarking on a preset course of increases in the federal funds rate after the initial increase, Yellen concluded. “Rather, we will adjust monetary policy in response to developments in economic activity and inflation as they occur. If conditions improve more rapidly than expected, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable.”