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The Federal Reserve’s historic liftoff in December left many to speculate when the Fed would raise the federal funds target rate again. So far this year, two Federal Open Market Committee (FOMC) meetings have come and gone with no further rate increase, and if Fed Chair Janet Yellen’s speech on Tuesday at the Economic Club of New York is any indication, it may be a while.
Yellen reiterated that the central bank expects that economic conditions in the U.S. will evolve in a manner that will “warrant only gradual increases” to the federal funds target rate and noted that along with labor market improvement, the FOMC expects only moderate growth for the medium term. She also pointed out that projections made by FOMC policy makers for economic growth, employment, and inflation in the March FOMC meeting are little changed from December.
“A key factor underlying such modest revisions is a judgment that monetary policy remains accommodative and will be adjusted at an appropriately gradual pace to achieve and maintain our dual objectives of maximum employment and 2 percent inflation,” Yellen said. “Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower.”
Janet Yellen,
Chair of the Board of Governors
Federal Reserve System
The median projection among FOMC participants in the March meeting for the federal funds target rate is now just 0.9 percent by the end of 2016 and 1.9 percent by the end of 2017, Yellen said. Both figures are a half a percentage point below the median projections made by FOMC policy makers in the December meeting.
Yellen noted that “the housing market continues its gradual recovery, and fiscal policy at all levels of government is now modestly boosting economic activity after exerting a considerable drag in recent years.”
Foreign economic growth that seems to be weaker this year than expected and declining expectations for earnings tend to weigh down the U.S. economy, but those headwinds have been offset by downward revisions to market expectations for the federal funds target rate. Those downward revisions have in turn put downward pressure on the longer-term interest rates (mortgage rates) which helps to support spending, Yellen said.
“These were dovish remarks by Chair Yellen,” said National Federal Association of Credit Unions Chief Economist Curt Long. “In focusing on the downside risks to the economic outlook, she bolstered the case for the Federal Open Market Committee’s decision not to increase rates in March and for taking a very gradual approach to normalization. Moreover, she was somewhat dismissive of the hawkish claim that inflation has moved higher recently. Instead, she said, the evidence is flimsy at this stage and that inflation expectations have actually declined. Overall, the comments add serious doubt to the prospect for a rate hike in April.”
Click here to read the full text of Yellen’s Tuesday speech at the Economic Club of New York.
