Yellen: Labor Market not Ready for Interest Rate Hike

The Federal Reserve Board Building in Washington, D.C. (Creative Commons)

By Lucy Ren

“Things have improved notably but we are not there yet,” Federal Reserve Chairwoman Janet Yellen said during the semiannual monetary policy report to Congress on Tuesday, as she reiterated the “patient” guidance on when the Fed will begin to raise the short-term interest rate.

Testifying before the Senate Banking Committee, Yellen said the labor market has not “fully healed yet.” She raised the concern that tightening the monetary policy with a rate hike now would hamper further recovery. “But monetary policy is highly accommodative,” Yellen added.

Some Republican senators argued that an interest rate hike is long overdue. Senator Pat Toomey (R-Pa.), Yellen’s most resistant critic on the committee, asserted that the financial crisis is “clearly long over,” and urged for normalization for monetary policy.

RELATED: Senator Challenges Yellen on Interest Rate. Full Story.

Yellen said important progress has been achieved toward the Federal Open Market Committee’s objective of maximum employment, but inflation is still “well-below the longer-run objective” and wage growth remains “sluggish.”

The growth of the U.S. average hourly earnings was described as “sluggish” by Federal Reserve Chairwoman Janet Yellen, leaving room for further recovery of the labor market. (Bloomberg, Lucy Ren/Medill)
The growth of the U.S. average hourly earnings was described as “sluggish” by Federal Reserve Chairwoman Janet Yellen, leaving room for further recovery of the labor market. (Bloomberg, Lucy Ren/Medill)

In December and January, the FOMC judged that it can be “patient” in beginning to raise the short-term rates, Yellen stated. “This judgment reflects the fact that inflation continues to run well below the Committee’s 2 percent objective, and that room for sustainable improvements in labor market conditions still remains.”

Yellen said the FOMC’s assessment that it can be patient in beginning to normalize policy means that “the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.” The target range for the past six years has been 0-0.25 percent.

The FOMC meetings will consider an increase in the target range for the short-term rate on “a meeting-by-meeting basis,” she said. The forward guidance will be altered before the rate hike takes place. At the same time, Yellen emphasized that “a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range.”

In the most recent FOMC minutes, many Fed officials favored delaying the interest rate hike to after midyear. Yellen said raising the interest rate too soon would lead to the “risk of undermining a recovery taking hold.”

In her testimony, Yellen also opposed the proposed legislation to “audit the Fed.” She emphasized the importance of the Fed’s being “free of short-term political pressure,” in order to “deliberate the best way to meet the responsibilities that Congress has assigned” to it, which are sustaining maximum employment as well as price stability.

Stocks edged up to all-time highs on Yellen’s testimony. The Standard & Poor’s 500 Index rose 0.28 percent to 2115.48.

Photo at Top: The Federal Reserve Board Building in Washington, D.C. (Creative Commons)