Federal Reserve chair Janet Yellen hinted on Friday that an increase in interest rates to “more normal” levels is coming, but such an increase would be gradual, to help the economy continue to recover.
“I have argued that a pickup in neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time, ” she said, adding, “That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.”
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But Yellen suggested the Fed should not wait too long, and move to raise interest rates back to their normal levels of six years ago.
“If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance.
“However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.”
Yellen said she believes that “the appropriate time has not yet arrived, ” but “conditions may warrant an increase in the federal funds rate target sometime this year.”
