Notwithstanding a growing spate of soft data points, the Federal Reserve is still on course to later this year begin raising its benchmark lending rate for the first time since late 2008, Chair Janet Yellen said Friday.
Addressing the Providence Chamber of Commerce in Rhode Island, Yellen made it clear that 2015 is not going to be a sizzling year for the U.S. economy as many had hoped. Citing inflation that’s too low and headwinds from housing, international trade and anemic business investment, she expected that “growth in employment and output will be moderate over the remainder of the year and beyond.”
That assessment pretty much shut the door on any chance that the Fed will raise in June its benchmark federal funds rate, which influences the cost of borrowing for car loans, mortgages and credit cards. The benchmark rate has been at near zero since December 2008, and economists now expect a first rate hike in September at the earliest.
Yellen made it clear in her lunchtime speech that she expects to hike rates soonish. If the economy continues to improve, she said, “it will be appropriate at some point this year to take the initial step to raise the federal funds rate and begin the process of normalizing economic policy.”
After the first hike, she cautioned, further rate hikes are likely to be gradual.
“The various headwinds that are still restraining the economy … will likely take some time to fully abate and the pace of that improvement is highly uncertain,” the Fed chief said.
Yellen appeared to be bothered than inflation remains at the low end of the Fed’s target range, and conditioned rate hikes on being “reasonably confident that inflation will move back to 2 percent over the medium term.”
In the latest inflation reading, the Labor Department reported Friday that the consumer-price index rose by 0.1 in April but remains down 0.2 percent from a year ago, the fourth straight month that it’s down from 12 months earlier.
The Fed, however, is most interested in what’s called core inflation, which does not include prices in the volatile food and energy sectors. That rose by 0.3 percent in April, the fastest monthly pace in two years, and 1.8 percent over the past 12 months, approaching the Fed’s desired 2 percent target.
One reason the economic recovery continues at a lumbering pace, the Fed chief suggested, is that the growth in productivity has been “disappointing.” The nation’s output-per-hour has averaged about 1.25 percent since the Great Recession began in December 2007, Yellen said, whereas it had averaged a gain of about 2.75 percent in the prior decade.