On Tuesday Janet Yellen announced that the Federal Reserve can still be patient before raising interest rates, though she has prepared the ground for an increase as early as mid-year.
While the market's concerns about a rise in the federal funds rate was growing, the Janet Yellen told a US Senate panel that the central bank was deep in preparation for the move after keeping the rate at zero for more than six years. She also outlined that the US labor market still showed cyclical weakness and inflation continued to fall.
And she said that frailties in China and Europe posed a risk for the US economy, supporting the need to keep the extraordinarily loose monetary policy in place a bit longer.
“A high degree of policy accommodation remains appropriate,” Yellen told the Senate Banking Committee.
Inflation keeps declining and despite the unemployment rate having fallen to 5.7 percent, the persistent lack of wage gains for average workers suggests the jobs market remains slack, Yellen noted.
As further measures will require full economic recovery, the Federal Open Market Committee (FOMC), the Fed’s policy board, still “considers it unlikely” that it will need to hike the federal funds rate “for at least the next couple of meetings.”
The prospect of tighter US monetary policy has already sparked currency and capital markets jitters, especially in more vulnerable emerging-market economies.
So far, Yellen has to both weigh the strength of the US economy to withstand the slowing effect of tighter money and also the global economy’s tolerance for the volatility that could accompany tightening.
The Fed particularly wants to be confident that higher rates do not stall the growth in hiring by US businesses.
At the same time, it is also wary that the longer it keeps rate extremely low, the greater the chance that speculative bubbles will build up and, separately, the conditions build for a burst of inflation.
