US Federal Reserve Chair Janet Yellen said on Wednesday that the US economy is improving, but added that the job market remains “far from satisfactory” and inflation is still below the US central bank’s target rate.
Speaking to the US Congress’ Joint Economic Committee, Yellen said that as a result, she expects low borrowing rates will continue to be needed for a “considerable time.”
Yellen’s comments echo earlier signals that the Fed has no intention of acting soon to raise its key target for short-term interest rates even though the job market has strengthened and economic growth is poised to rebound this year. The Fed has kept short-term rates at a record low near zero since December 2008.
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Asian stock markets were mostly higher yesterday after China’s trade improved and Yellen vowed low interest rates would continue until the US job market is healthy. Tokyo’s Nikkei 225 stock index, the region’s heavyweight, advanced 0.9 percent to 14,163.78, and South Korea’s KOSPI added 0.6 percent to 1,950.60, while Hong Kong’s Hang Seng rose 0.3 percent to 21,818.38 and China’s Shanghai Composite gained 0.2 percent to 2,013.98.
At the committee, Yellen cautioned that geopolitical tensions, a renewal of financial stress in emerging markets and a faltering housing recovery pose potential threats.
In response to a question, Yellen described rising income disparities in the US as a “very worrisome trend” that could undercut economic stability and democratic principles. However, she cautioned that “it’s hard to get clear evidence” that pay or wealth disparities have slowed economic growth.
US Senator Roger Wicker argued that the Fed’s own policies had helped widen the wealth gap in the US. The Fed-engineered low rates, intended to fuel the economy, have boosted stock prices and wealth for the richest Americans, Wicker said.
Yellen countered that low rates had strengthened overall economic growth and helped home prices recover from the housing bust, thereby helping ordinary households.
US Representative Kevin Brady, the committee chairman, pressed Yellen to specify when the Fed might start raising short-term rates and how it would act to pare its record holdings of Treasury and mortgage bonds.
Yellen said she could not give a date, but added that the Fed expects to begin raising rates when it sees enough progress in restoring full employment and when inflation has returned to its target of 2 percent.
She pointed to the Fed’s latest quarterly economic forecasts, which showed that most members expect the Fed to begin raising short-term rates next year or 2016.
Yellen added that even when the Fed’s bond purchases end, it intends to maintain its high level of holdings and will begin to reduce them only when the economy can withstand the pullback. The Fed’s record investment portfolio exceeds US$4 trillion.
However, Yellen said the Fed wants to avoid past mistakes of keeping its policies loose for too long and thereby fueling inflation. She cited the prolonged bout of high inflation of the 1970s.
“The lessons of that period are very real to all of us, and none of us want to make that mistake again,” Yellen said.
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