With a "largely favorable" view of the economy, despite "recent signs of a slowdown in job creation [that] bear close watching" and inherent uncertainty, Federal Reserve Board Chair Janet Yellen said Monday, monetary policy is currently "generally appropriate," but hikes will be needed "gradually over time."
She offered no real indication whether she wants rates raised at the June Federal Open Market Committee meeting.
"My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labor market improvement that will help return inflation to 2 percent," she told The World Affairs Council of Philadelphia, according to prepared text released by the Fed. "At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run."
While policy was termed "stimulative" by Yellen, she said it might not be "as stimulative as [it] might appear at first glance." Many observers estimate the current neutral rate is near zero, although the "current actual value of the federal funds rate, also measured in real terms, is even lower, somewhere around minus 1 percent. With the actual real federal funds rate modestly below the relatively low neutral real rate, the stance of monetary policy at present should be viewed as modestly accommodative," she said.
"I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation, provided that labor market conditions strengthen further and inflation continues to make progress toward our 2 percent objective," she said. "Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC's goals are fully reached. And if the headwinds that have lingered since the crisis slowly abate as I anticipate, this would mean that the neutral rate of interest itself will move up, providing further impetus to gradually increase the federal funds rate. But I stress that the economic outlook, including the pace at which the neutral rate may shift over time, is uncertain, so monetary policy cannot proceed on any preset path."
With financial market turbulence and weak economic data earlier this year, the FOMC decided to keep rates where they were, but Yellen said there's been "significant" recovery since then, and diminished risks globally, although some concerns remain.
However, other questions have arisen, in part as a result of weaker employment reports.
Overall, Yellen said her message is "largely favorable" despite mixed developments. "Most importantly, the economy has registered considerable progress over the past several years toward the Federal Reserve's goals of maximum employment and price stability, and … there are good reasons to expect that we will advance further toward those goals."
Should data show stronger labor markets and rising inflation, "as I expect," Yellen said, "further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. However, I will emphasize that monetary policy is not on a preset course and significant shifts in the outlook for the economy would necessitate corresponding shifts in the appropriate path of policy."
While the recovery has been going on for seven years, and has not always gone smoothly, "the gains have been impressive," she noted. The substantial improvement in the jobs market has come "close to eliminating the slack that has weighed on the labor market since the recession."
While the latest jobs report was "disappointing" and "concerning," Yellen said there were encouraging points, and "one should never attach too much significance to any single monthly report."
Also, other reports on labor, including initial unemployment claims, have been positive, as has been "the public's perceptions of the health of the labor market, as reported in various consumer surveys."
"To be sure, there is considerable uncertainty about the economic outlook that I have been discussing, and, as I have already noted, we should expect to be surprised in the future just as we have been surprised in the past," Yellen said.
