Despite announcements that the Fed would certainly be spiking interest rates, Federal Reserve Chair Janet Yellen delivered a speech on Tuesday providing more clarity to the current state of inflation and interest rate uncertainty.
During her speech, Yellen focused on the uncertainty with inflation and monetary policy, stating that it would be, “imprudent to keep monetary policy on hold until inflation is back to 2 percent.”
Yellen admits the Fed may have misjudged the strength of the labor market and the degree to which longer-run inflation expectations are consistent with its inflation objective, or even the fundamental forces driving inflation.
“In interpreting incoming data, we will need to stay alert to these possibilities and, in light of incoming information, adjust our views about inflation, the overall economy, and the stance of monetary policy best suited to promoting maximum employment and price stability,” she said.
In addition, current inflation developments for both overall and core inflation have “slipped again in recent months” after moving up last year, according to Yellen.
She continued to explain that sustained low inflation is undesirable because it leads to low settings of the federal funds rate in normal times, providing less scope to ease monetary policy to fight recessions.
“A persistent undershoot of our stated 2 percent goal could undermine the Federal Open Market Committee’s (FOMC) credibility, causing inflation expectations to drift and actual inflation and economic activity to become more volatile,” Yellen said.
Accordingly, she promised that the Fed would monitor incoming data closely and stand ready to modify its views based on what has been learned.
“What are the policy implications of these uncertainties? For one, my colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it,” she said.