Gradual increases in the fed funds rate remain appropriate as the neutral rate stays at a low level by historical standards, Federal Reserve Board Chair Janet Yellen testified Thursday.
"Waiting for further evidence does not reflect a lack of confidence in the economy," Yellen told the Joint Economic Committee, according to prepared text released by the Fed. "Rather, with the unemployment rate remaining steady this year despite above-trend job gains, and with inflation continuing to run below its target, the [Federal Open Market] Committee judged that there was somewhat more room for the labor market to improve on a sustainable basis than the Committee had anticipated at the beginning of the year."
Still the FOMC realizes monetary policy must be forward looking, knowing if it waits too long to act, "it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals."
Additionally, delaying too long could result in "excessive risk-taking" that could harm financial stability.
With the neutral rate so low, monetary policy remains moderately accommodative, she said, meaning "the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years. Of course, the economic outlook is inherently uncertain, and, as always, the appropriate path for the federal funds rate will change in response to changes to the outlook and associated risks."
"At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives," Yellen noted.
