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Fed’s Yellen Leans on Economy for Future Rate Hikes

FedFederal Reserve Chair Janet Yellen said Monday that the central bank will raise the federal funds rate when economic outlook uncertainties clear the air.

Yellen spoke today at the World Affairs Council of Philadelphia and showed that she believes that the Fed will still raise rates this year if and when the economy improves.

However, the rate increase at the Fed's June meeting, which Yellen noted would be "likely," has been nearly ruled out due to the most recent employment data released last week.

Minutes from the last meeting said, "Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June."

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Janet Yellen

"My colleagues and I will make our policy decisions based on what incoming information implies for the economic outlook and the risks to that outlook. What is certain is that monetary policy is not on a preset course, and that the Committee will respond to new data and reassess risks so as to best achieve our goals." -Janet Yellen, Chair, Federal Reserve. 

Yellen explained in her speech today, "While the general picture of the labor market is largely positive, some people are still struggling."

She continued, "While the economy has made great strides toward the FOMC's objective of maximum employment, somewhat less progress has been made toward our inflation objective. Inflation has run persistently below the Fed's goal of 2 percent over the past several years even as the labor market strengthened significantly."

Yellen noted in her speech in Philadelphia that although the jobs data was "concerning," she emphasized that "one should never attach too much significance to any single monthly report."

According to Yellen, there is "uncertainty about the economic outlook" and "we should expect to be surprised in the future just as we have been surprised in the past." She identified four areas of uncertainty seem particularly salient at present:

  1. Trust and resilience of domestic demand
  2. Economic situation abroad
  3. Productivity growth
  4. How quickly inflation will move back to 2 percent.

"I have explained why I expect the U.S. economy will continue to improve and why I expect that further gradual increases in the federal funds rate will probably be appropriate to best promote the FOMC's goals of maximum employment and price stability," Yellen said. "I have also laid out the considerable and unavoidable uncertainties that apply to both this outlook for the economy and to the appropriate path of the federal funds rate. My colleagues and I will make our policy decisions based on what incoming information implies for the economic outlook and the risks to that outlook. What is certain is that monetary policy is not on a preset course, and that the Committee will respond to new data and reassess risks so as to best achieve our goals."

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