Yellen: “Fed Can Be Patient in Normalizing Policy.” Fed Revises Forward Guidance

yellenFed Chair Janet Yellen spoke before the Senate Banking Committee on Tuesday and explained that the Federal Reserve can be patient in beginning to normalize policy while suggesting that it is unlikely that economic conditions will warrant an interest rate hike for at least the next couple of FOMC meetings.

Yellen said that “considerable progress” has been achieved with job growth.

She cited the 5.7 percent unemployment level for January along with 280,000 job gains created per month during the second half of 2014.

Yellen also admitted that room for further improvement remains, especially with sluggish wage growth and the labor force participation rate showing weakness compared to most estimates of its trend.

Yellen indicated that if economic conditions continue to improve, as the Committee anticipates, the Federal Reserve will at some point begin considering an increase in the target range for the federal funds rate on a “meeting-by-meeting basis” and noted that before then the Fed will change its forward guidance because conditions have improved.

Yellen explained that more incoming labor and inflation data is needed before an interest rate hike decision can be reached by Fed Committee members.

“Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective” Yellen stated.

Yellen said that Fed members expect inflation to decline further in the near term before rising gradually toward 2 percent over the medium term “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

Yellen will be speaking today before the House Financial Services at 10:00 am EST.

-Johnathan Schweitzer

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