Yellen says Fed on course for 2015 rate rise even after slowdown

[RHODE ISLAND] A first-quarter economic chill won't deter the Federal Reserve from its plan to raise interest rates this year, Chair Janet Yellen said, assuring investors that the pace of subsequent tightening will be gradual.

Although the labor market is nearing full strength, "we are not there yet," she said Friday in a speech in Providence, Rhode Island, emphasising the Fed will proceed "cautiously." If the economy continues to improve as she expects, "it will be appropriate at some point this year" to start raising rates, Ms Yellen, 68, said in her first public comments on the policy outlook since late March.

Ms Yellen's comments show a determination to act this year, while avoiding a shock to the still-fragile economy by stressing that the cost of everything from car loans to mortgages will stay low for years. The Fed has kept rates near zero since December 2008.

"It's clearly going to be one of the most dovish tightenings you'll ever see," said Dana Saporta, US economist at Credit Suisse Group AG in New York.

US stocks closed lower, with the Standard & Poor's 500 Index down 0.2 per cent to 2,126.23 at 4 pm in New York, after closing Thursday at a record. The yield on the benchmark 10-year Treasury note was up two basis points, or 0.02 percentage point, to 2.21 per cent.

Fed officials want to avoid surprising investors, as they did in mid-2013 when bond yields soared, minutes of the April 28-29 Federal Open Market Committee meeting released on Wednesday show.

Ms Yellen said the best way for the Fed to achieve its policy goals would be "by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level." She repeated the Fed's two criteria for raising rates, which have been kept near zero since December 2008: "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 per cent over the medium term." Policy makers expect growth to pick up after stalling in the first quarter, even as they fret about the strength of the consumer spending that makes up two-thirds of the economy, the April minutes show.

Ms Yellen said the US "seems well positioned for continued growth" as consumers benefit from cheaper gasoline prices that amount to a boost to purchasing power estimated at about US$700 per household on average.

"Her tone strikes me as someone who is trying to lay the groundwork for a rate hike soon," Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, wrote in a note to clients. "The September FOMC meeting is 117 days away." Rates will probably be lifted in September, according to the median forecast in a Bloomberg survey of economists. The April minutes showed that officials "thought it unlikely" they would act at their next meeting on June 16-17.

Weak growth overseas, which has helped to push up the value of the dollar against the currencies of American trading partners, has "dented US exports and weighed on our economy," Ms Yellen said Friday, adding that "this headwind too should abate as growth in the global economy firms." Yellen noted that home prices are recovering and said population growth is creating a need for more housing. Nevertheless, she said, credit remains tight and "activity in the housing sector is likely to improve only gradually." Ms Yellen spoke to the Greater Providence Chamber of Commerce. Senator Jack Reed, a Democrat from Rhode Island, helped facilitate her appearance before the group, said his spokesman Chip Unruh, and Laurie White, the chamber president.

Mr Reed has introduced a bill requiring the head of the New York Fed be picked by the president and confirmed by the Senate.

Yellen's speech brings her back to the city where she discovered economics as an undergraduate at Brown University. She began with a philosophy concentration but switched to economics to study with professors Herschel Grossman and George Borts.

Mr Borts and Mr Grossman "taught me that economics was a subject where a systematic way of thinking about the world translated into policy prescriptions with real social impact," Ms Yellen said, according to Brown's alumni magazine.

"I remember sitting in Herschel Grossman's class and thinking, 'Gee, I didn't realise how much influence the Federal Reserve has on the health of the economy. If I ever have a chance at public service," she said, working at the Fed "would be a worthwhile thing to do.'"

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