Fed Chair Yellen Takes Interest Rate Talk to Congress
By Burt Carey
Federal Reserve Chairwoman Janet Yellen goes before Congress later this week to present the semi-annual Monetary Policy Report. Given her comments to the City Club of Cleveland last week, her message to lawmakers will be clear: Expect the Fed to
raise interest rates later this year.
“I expect it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen said. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years.”
International events, such as the Greek government debt default and China’s plummeting stock market, could also slow the Federal Reserve’s move toward the first interest rate hike in nine years. An increase would affect a wide variety of consumer loans, including those for automobiles as well as student loans.
Yellen faces the U.S. House of Representatives on Wednesday with a follow-up briefing in the Senate on Thursday, when she delivers what is known as Humphrey-Hawkins testimony. In the late 1970s, Sen. Hubert Humphrey and Rep. Augustus Hawkins designed the current regulations which require the Fed chair to brief lawmakers.
Yellen said she expects the Fed to raise interest rates sometime this year but also suggested concerns that weak U.S. labor markets haven’t fully recovered.
“It is my judgment that the lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labor market — in other words, how far away we are from a full-employment economy,” she said. “A significant number of individuals still are not seeking work because they perceive a lack of good job opportunities. While the labor market has improved, it still has not fully recovered.”
Yellen said the share of workers in part-time jobs who would prefer full-time work remains higher than it would be in a full-employment economy. The Department of Labor reported the nation’s unemployment rate has dropped to 5.3 percent, but a large part of that decline is due to the lowest labor participation rate in four decades.
Despite those dismal numbers, Yellen predicts a better economic outlook for the country. “Looking further ahead, I think that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years,” Yellen said. “In particular, I anticipate that employment will continue to expand and the unemployment rate will decline further.”
The Fed, Yellen says, is also concerned with stagnant wages, which have risen at just 2 percent on an annualized basis this year and were unchanged in the past month.
Yellen noted that a strong dollar has impacted U.S. exports and lower oil prices have led to a decline in business investment, a combination of factors that have been holding the economy down. “We expect the drag on domestic economic activity from these factors to ease over the course of this year, as the value of the dollar and crude oil prices stabilize,” she said. “And I anticipate moderate economic growth, on balance, for this year as a whole.”