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 In her second public speech since taking the Fed's helm, Yellen was
careful not to predict when interest rates would rise from near
zero. Instead, she stressed the decision would hinge on healing in
the labor market and on how briskly inflation rises toward the Fed's
2 percent goal.
Yellen's relatively staid remarks to the Economic Club of New York
intensified somewhat when Martin Feldstein, a Harvard University
professor and former adviser to President Ronald Reagan, asked her
whether she would let inflation creep above 2 percent to give the
economy a bit more support.
"With inflation running at around 1 percent, at this point I think
the risk is greater that we should be worried about inflation
undershooting our goal and getting inflation back up to 2 percent,"
Yellen said.
The central bank will "of course" eventually need to tighten policy
to avoid a run-up in inflation, she said. "Overshooting that goal
... can be very costly to reverse."
Yellen noted the Fed was not alone in its struggle to move inflation
higher as a buffer against an economically disabling deflation. The
European Central Bank is mulling unconventional policies that could
lift inflation in the euro zone, while Japan has been mired in
deflation for 15 years.
The Fed has kept its key rate near zero since the depths of the
financial crisis in late 2008, and has bought more than $3 trillion
in assets to help depress borrowing costs and stimulate economic
growth amid a frustratingly slow recovery.
While the central bank's preferred inflation gauge is just above 1
percent, a more popular measure firmed in March. Jobs growth was
also decent last month, but the unemployment rate stayed high at 6.7
percent as Americans returned to the labor market in droves to
search for work.
U.S. stocks added to gains on Yellen's remarks, which investors
viewed as underscoring the Fed's willingness to be patient in
nursing the economy back to full health.
"This concern about the persistent weakness in inflation provides
the key justification for the Fed to remain cautious about
tightening policy prematurely or too aggressively," said Millan
Mulraine, deputy chief economist at TD Securities.
VAGUE ROAD MAP FOR WALL STREET
An apparent pick up in the world's largest economy after a sluggish
winter has many investors attempting to predict when the Fed will
finally raise rates, with most eying mid-2015.
Yellen herself said it was "quite plausible" the economy would be
back to near full employment and a healthier level of inflation by
the end of 2016. "We are seeing very meaningful progress, although clearly ... the
goal has not been achieved at this point," she said. "We will be
very focused on removing accommodation when the right time has
come."
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In the last few years, the Fed has tried an array of strategies to
telegraph just how long it will wait to tighten policy, including
tying the ultra-low rates to time periods, and later, to specific
unemployment and inflation thresholds.
Last month it rolled out its latest version of forward guidance,
effectively promising not to raise rates for a "considerable time"
after it halts its bond-buying program. But Yellen sowed more
confusion when she then told a news conference that a "considerable
time" means about "six months" or so, causing a selloff in stocks
and bonds.
Yellen did not mention the six-month term on Wednesday.
How long rates will stay near zero, she said, will depend on how far
the U.S. economy remains from the central bank's goals of 2 percent
inflation and maximum sustainable employment, and how long it will
likely take to meet them.
She repeated her view that there is likely more slack in the labor
market than suggested by the unemployment rate, which lessens the
risk of inflationary wage gains as the economy strengthens.
But she emphasized that unforeseeable events could alter the central
bank's current course, as it has several times since the economy
began recovering from the 2007-2009 recession.
The Fed could even set aside efforts to wind down its bond-buying
stimulus if dealt an economic surprise, Yellen said. Financial
markets believe the Fed is nearly certain to end its purchases by
year end.
(Reporting by Jonathan Spicer; additional reporting by Ann Saphir
and Krista Hughes; editing by Chizu Nomiyama, Andrea Ricci and Chris
Reese)
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