With unemployment high and inflation low, the Federal Reserve is in no hurry to raise interest rates, two Federal Reserve officials said on Tuesday.
The Fed cut its key target rate to near zero in December 2008 and pumped more than US$1 trillion into the world’s biggest economy to blunt the worst downturn since the Great Depression.
While a mild recovery has taken hold and the jobs market has begun to stabilize, the officials said scant signs of inflation mean the Fed’s vow to keep near-zero rates for an extended period continued to be warranted.
“Such an accommodative policy is currently appropriate, in my view, because the economy is operating well below its potential and inflation is subdued,” San Francisco Federal Reserve president Janet Yellen said at a Town Hall Los Angeles luncheon.
“I don’t believe this is yet the time to be tightening monetary policy,” she said.
Earlier on Monday in Shanghai, Chicago Federal Reserve Bank president Charles Evans said he believed the Fed’s “extended period” language means no change to rates for at least three to four meetings of the policy-setting Federal Open Market Committee (FOMC) — or about six months.
“I’m hopeful that businesses will be surprised by the strength of demand over the next year and that they will actually begin to add workers, but it is quite a cautionary prospect for the US and that leads me to think that monetary policy is likely to continue to be accommodative for an extended period of time,” said Evans, who is not a voting member of the Fed’s policy-setting committee this year.
Yellen is US President Barack Obama’s top pick for vice chairman of the Fed board to replace Donald Kohn, a 40-year Fed veteran who plans to retire on June 23.
She is not a voting member of the policy-setting FOMC this year, but she will gain a vote if confirmed in the role of vice chairman.
Yellen said as the recovery takes hold, the time will come for the Fed to boost short-term interest rates.
To do so, it will likely increase the rate the Fed pays on the reserves banks hold at the Fed, an increase that should bring up other short-term interest rates as well.
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