Federal Reserve Chair Janet Yellen served notice that a change in the Fed’s pledge to be “patient” on the timing of an interest-rate increase would signal that liftoff could come at any meeting, while not locking policy makers into a timetable for tightening.
“It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings,” Yellen said in testimony before the Senate Banking Committee.
“Instead, the modification should be understood as reflecting the committee’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.”
Yellen Tuesday repeated that the Fed’s pledge to be “patient” on beginning to raise the benchmark interest rate means an increase is unlikely for “at least the next couple” of meetings. The central bank adopted the guidance in December and repeated it in January.
Stocks rose to all-time highs on Yellen’s testimony. The Standard & Poor’s 500 Index rose 0.2% to a record 2,115.05 as of 11:11 a.m. in New York. The Nasdaq Composite Index was little changed after a nine-day gain took it 1.7% away from its 2000 record. Ten-year Treasury yields fell two basis points to 2.04%.
While “important progress” has been made toward the Fed’s goal of maximum employment, Yellen said today, “too many Americans remain unemployed, wage growth is still sluggish and inflation remains well below our longer-run objectives.”
Fed policy makers are trying to judge whether the labor market has improved enough to warrant raising interest rates in coming months, even as inflation remains well below their 2% goal.
A market-based measure Tuesday put the odds of a June liftoff at around 19%, based on futures and options trading data compiled by Bloomberg. This compares with odds of around 25% before publication last week of minutes of the Jan. 27-28 meeting, which surprised many investors by showing that many officials were inclined to hold rates near zero for a longer time.
Yellen repeated that the FOMC, before raising rates, will want to be “reasonably confident” that inflation will move back up to the central bank’s goal. Its preferred gauge of inflation, the personal consumption expenditures index, has stayed below 2% since April 2012, and it rose just 0.7% in the year through December.
She also restated the committee’s view that the recent drop in inflation was principally due to oil’s plunge.
“The committee expects inflation to decline further in the near term before rising gradually toward 2% over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate,” she said.
The U.S. economic picture has brightened in recent months, encouraging the Fed to end its program of buying bonds in October in a first step in tightening policy.
In the seven months through January, employers added more than 1.9 million workers to non-farm payrolls, helping to reduce the jobless rate to 5.7%. The economy recovered from a first-quarter slump to expand at a 2.4% pace in 2014, the most since 2010.
Some of Yellen’s colleagues on the rate-setting Federal Open Market Committee have argued the bank should already be raising rates in order to head off a potential jump in inflation or the emergence of destabilizing financial bubbles.
Yellen pointed to risks to the U.S. from abroad, citing “disappointing foreign growth and changes in monetary policy abroad” as reasons longer-term interest rates falling “significantly” since mid-2014 in the U.S. and other advanced economies.
Slowing across foreign economies “could pose risks to the outlook for U.S. economic growth” and despite slight pickups in the second half of last year, Yellen said other nations “are confronting a number of challenges that could restrain economic activity.”
Yellen said China, the world’s second-largest economy, “could slow more than anticipated” as policy makers work to reduce risk in financial markets and rely less on exports, while euro area still faces slow growth and low inflation.
Still, she cited a potential boost from other central banks adding stimulus. “We could see economic activity respond to the policy stimulus now being provided by foreign central banks more strongly than we currently anticipate, and the recent decline in world oil prices could boost overall global economic growth more than we expect,” Yellen said.