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Rate hike unlikely before June: Yellen

Tuesday, February 24, 2015 - 23:28
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Federal Reserve Chair Janet Yellen said on Tuesday that the US labour market still showed cyclical weakness and inflation continued to fall, making any interest rate hike unlikely before June.

[WASHINGTON] Federal Reserve Chair Janet Yellen said on Tuesday that the US labour market still showed cyclical weakness and inflation continued to fall, making any interest rate hike unlikely before June.

In testimony in Congress, Yellen also said that frailties in China and Europe continued to pose a risk for the US economy, supporting the need for keeping the extraordinarily loose monetary policy currently in place.

But she said that generally, the US economy continued to grow fast enough to bring down unemployment, and the Fed expected that inflation would return back to normal over the medium term.

That leaves the Fed still on course to begin normalizing monetary policy later this year after keeping its base interest rate at the zero level for more than six years.

In prepared testimony on monetary policy to the Senate Banking Committee, Yellen reiterated that policymakers will remain patient before tightening policy.

She said the Federal Open Market Committee, 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." Inflation is still falling, she said, and "room for sustainable improvements in labour market conditions still remains."

The FOMC calendar has upcoming meetings in mid-March and late-April, leaving the earliest time for a hike on the calendar Yellen sketched out the June 16-17 meeting.

With unemployment now having dropped to 5.7 per cent on a strong pace of job creation since the middle of last year, the Fed's focus is on inflation.

"A high degree of policy accommodation remains appropriate," Yellen said.

Even stripping out the sharp fall in oil prices, inflation is continuing to sag and could decline further this quarter before turning up.

So, she said, the FOMC will not move on rates until it "is reasonably confident that inflation will move back over the medium term toward our two per cent objective."

Yellen said the fall in oil prices, more than 50 per cent since the middle of last year, may have caused disruptions in the oil industry, including sizable layoffs.

But on the whole, she said, the low oil price "is likely to be a significant overall plus" for the US economy.

On the other hand, she revealed worries about economic challenges abroad.

In China, she said, growth could slow more than Beijing's leaders currently expect.

"In the euro area, the recovery remains slow, and inflation has fallen to very low levels." Despite the substantial loosening of monetary policy in Europe, she said, "downside risks to economic activity in the region remain."

Yellen, one year into her term as Fed chair, is tasked with normalizing monetary policy after years of extraordinarily low interest rates to fight the drag from the 2008-2009 Great Recession.

As much as the Fed wants to take the step away from the zero level for the fed funds rate, she 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 sure that higher rates do not stall the growth in hiring by US businesses. Yet, 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.

AFP