Fed Chair Janet Yellen delivered her semi-annual testimony to the Senate Banking Committee. In her prepared remarks, Ms Yellen said that a high degree of monetary policy accommodation remains appropriate. She said that there are still too many unemployed and inflation remains below the Fed’s longer run goal. She noted that although growth rebounded in the second quarter, it still ‘bears closely watching’.
She confirmed that asset buying will end after October if FOMC outlook is met. The FOMC will make its decisions on employment and inflation progress. Although inflation is back up toward the 2 percent it is still below the Fed’s target but expects it to move toward 2 percent in coming years. Mr Yellen said that considerable slack remains in the labor market. She also noted that conversations on normalization at FOMC meetings do not imply that there will be an imminent policy change. Regarding the housing sector, she noted that it has shown ‘little recent progress’.
Ms Yellen noted that the ‘outlook for the economy and financial markets is never certain and now is no exception. Therefore, the Committee's decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.’
In her QA session, Ms Yellen said that there were mixed signals concerning the economy, but many indicators are now substantially more positive. She noted that first quarter GDP understated the momentum in the economy. The Fed needs to be quite cautious with respect to monetary policy since the Fed has seen ‘false dawns’ in the recovery before this. Rather the Fed needs to be careful that the economy is on a solid trajectory.
In response to a question regarding when the first Fed funds rate would occur, Ms Yellen said that there is no formula or mechanical answer. She noted that progress on employment and inflation will influence the timing. Should things continue, most on the FOMC see the first rate increase sometime in 2015 and a Fed funds rate of 1 percent at the end of 2015.
In a question concerning the accuracy of the FOMC’s forecast, Ms Yellen acknowledged that projections especially for GDP have been off. But she noted that the timing of a rate increase would depend on actual results as well as the outlook. She noted that monetary policy has to respond to unfolding events and it would be a terrible mistake for the Fed to specify a mathematical rule. Rather it make sense to behave in a relatively systematic way.