US Federal Reserve Chair Janet Yellen signaled that the US central bank would likely start raising borrowing costs later this year, even before inflation and wages have returned to health, but added that the return to normal interest rates would be gradual.
A downturn in core inflation or wage growth could force the Fed to delay the first increase to borrowing costs since 2006, Yellen said on Friday, but policymakers should not wait for inflation to rise near the Fed’s 2 percent goal before tightening monetary policy. The Fed has held short-term borrowing costs near zero since December 2008.
After the first rate increase, Yellen said, a further, gradual tightening in monetary policy will likely be warranted. If incoming data fails to support the Fed’s economic forecast, the path of policy will be adjusted, she said.
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“With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year,” Yellen said at a monetary policy conference at the Federal Reserve Bank of San Francisco.
Yellen added that while the Fed is giving “serious consideration” to beginning to reduce its accommodative monetary policy, the timing and the path of a rate hike would depend on the incoming economic data.
“The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation,” she said.
Yellen, returning to the regional Fed bank she used to run, is under pressure to begin tightening monetary policy without disrupting the US economic recovery under way.
With labor markets looking set to improve further and one-time downward pressure on inflation likely to dissipate, a “modest” rate rise would be unlikely to put a halt to jobs growth, Yellen said. At the same time, raising rates too fast could undercut an economy that has for years been laboring against lingering headwinds from the severe recession, she said.
Several Fed officials have said the central bank has waited too long to bump rates higher and the delay risks stoking inflation and asset bubbles.
However, inflation has remained stubbornly low, complicating the Fed’s plan to part ways with its accommodative monetary policy.
Yellen said that if economic conditions evolve how the Fed’s policy setting committee anticipates, “I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis and the balance of risks I have enumerated of moving either too slowly or too quickly.”
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