With considerable slack in labor markets and inflation below the Federal Reserve's 2% target, "a high degree of monetary accommodation remains warranted," Federal Reserve Board Chair Janet Yellen said Wednesday.
"[W]e anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may, for some time, warrant keeping the target federal funds rate below levels that the Committee views as normal in the longer run," she testified before the Congressional Joint Economic Committee, according to text released by the Fed.
"Because the evolution of the economy is uncertain, policymakers need to carefully watch for signs that it is diverging from the baseline outlook and respond in a systematic way to stabilize the economy," she said.
Yellen testified that the Federal Open Market committee has attempted to "communicate as clearly as possible" how outlook changes will alter policy.
The slowdown in gross domestic product growth in the first quarter resulted from "transitory factors," including weather, Yellen said, adding recent data suggest "a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter." However housing activity has been weak and bears watching.
The labor market continues improving, although she termed it "still far from satisfactory." Despite drops in the unemployment rate, it remains "elevated." Also, the number of people out of work more than six months, and those working part-time despite wanting full-time are "historically high." Also, compensation levels are "rising slowly," a sign of slack in the market.
Yellen expects GDP to rise this year, with inflation moving toward 2%. "A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen."
As for risk, foreign stresses and housing market weakness head the list.
