Blaming “transitory factors” for low inflation rates, Federal Reserve Board Chair Janet Yellen said Wednesday she expects gradual fed funds rate increases for “the next few years.”
“We continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the [Federal Open Market Committee]’s 2 percent objective,” Yellen was to testify before the Joint Economic Committee, according to her statement, released by the Fed. “That expectation is based on the view that the current level of the federal funds rate remains somewhat below its neutral level.”
However, while the neutral rate seems quite low by historical standards, “implying that the federal funds rate would not have to rise much further to get to a neutral policy stance,” Yellen said most FOMC participants expect the neutral rate will gain, making further increases in the fed funds rate “likely” to “be appropriate over the next few years to sustain the economic expansion.”
While the labor market added fewer jobs this year than last, the gains were “still above the range that we estimate will be consistent with absorbing new entrants to the labor force in coming years,” she said.
Economic growth has “stepped up from its subdued pace early in the year,” Yellen noted, “despite the disruptions” from major hurricanes.
Turning to inflation, while gas price spikes after the hurricanes “temporarily pushed up measures of overall consumer price inflation,” excluding food and energy, price inflation “has remained surprisingly subdued.”
“In my view, the recent lower readings on inflation likely reflect transitory factors,” Yellen testified. “As these transitory factors fade, I anticipate that inflation will stabilize around 2 percent over the medium term. However, it is also possible that this year’s low inflation could reflect something more persistent. Indeed, inflation has been below the Committee’s 2 percent objective for most of the past five years. Against this backdrop, the FOMC has indicated that it intends to carefully monitor actual and expected progress toward our inflation goal.”
Balance sheet runoff has yielded “little, if any, market effect,” she said, but the Fed would be ready to change policy should future events result in a “sizable” drop in the fed funds rate.
Further, Yellen testified, while “asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalized and broad measures of leverage and credit growth remain contained.”
