11 Apr

Fed Chair Yellen Says Economy Close to Achieving Fed Goals

Latest News

Posted by: John Dunford

Federal Reserve Chair Janet Yellen said Monday that the central bank is close to achieving its goals on employment and inflation. Her remarks could be seen as providing support for gradual increases in interest rates.

While expressing satisfaction with how the economy is performing, Yellen did voice concerns about moves in Congress to limit the Fed’s independence.

Yellen told an audience at the University of Michigan that unemployment is now below the point the Fed views as full employment, dipping to 4.5 per cent in March. A key inflation gauge is moving toward the Fed’s 2 per cent target for price stability.

Yellen did not specifically address the timing for future rate hikes, but her remarks support the view that future hikes are coming. The Fed last raised rates in March, a quarter-point move that was the second increase in three months.

“We are doing pretty well” in terms of the Fed’s goals, Yellen said. “The economy is growing at a moderate pace.”

The Fed’s next meeting is May 2-3 and most private economists believe a rate hike at that time is unlikely. But they say rates could be raised at the June meeting and again in September.

In her comments, which came in the form of a discussion led by Susan M. Collins, dean of the university’s Gerald R. Ford School of Public Policy, Yellen expressed concerns about moves in Congress to limit the central bank’s independence.

She specifically mentioned legislation that would subject the Fed’s decision on interest-rate policies to review by the Government Accountability Office, the auditing arm of Congress. She also cited a proposal to require the Fed to follow a specific formula for setting interest rates with any deviation from that formula subject to GAO reviews.

“Our independence is under some threat,” Yellen said, citing the various bills that have been introduced. She said these changes could end up harming the Fed’s ability to manage the economy to promote low unemployment and guard against accelerating inflation.

“The independence of a central bank to make decisions about monetary policy free of … political pressures is very important,” Yellen said.

Last week, the Fed revealed that officials had discussed at their March meeting the timing for the start of a process of reducing the central bank’s holdings of Treasury bonds and mortgage backed securities, which the Fed purchased as a way to lower long-term interest rates and jump-start economic growth following the 2007-2009 recession.

The minutes of the Fed’s March discussion showed that officials discussed beginning to reduce the Fed’s $4.5 trillion balance sheet by the end of this year sooner than many investors had been expecting.

Yellen was not asked about the timing for a reduction in the Fed’s balance sheet during her Ann Arbor appearance, but other Fed officials have indicated in recent days that they could support efforts to gradually trim the bond holdings beginning by the end of this year.

When the reduction in the Fed’s holdings does begin, that will likely to put further upward pressure on long-term interest rates such as home mortgages.