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 Yellen spoke amid growing concern at the Fed about volatility in
financial markets once it begins to raise rates, and a desire to
begin coaxing skeptical investors toward accepting the inevitable:
that a 6-1/2-year stretch of near-zero interest rates would soon
end.
In a speech to a business group in Providence, Rhode Island, Yellen
said she expected the world's largest economy to strengthen after a
slowdown due to "transitory factors" in recent months, and noted
that some of the weakness might be due to "statistical noise."
The confident tone suggested the Fed wants to set the stage as early
as possible for its first rate rise in nearly a decade, with Yellen
stressing that monetary policy must get out ahead of an economy
whose future looks bright.
While cautioning that such forecasting is always highly uncertain,
and citing room for improvement in the labor market, the Fed chief
said delaying a policy tightening until employment and inflation hit
the central bank's targets risked overheating the economy.
"For this reason, if the economy continues to improve as I expect, I
think it will be appropriate at some point this year to take the
initial step to raise the federal funds rate target," and begin
normalizing monetary policy, Yellen told the Providence Chamber of
Commerce.
In a speech in March, Yellen said only that a rate hike "may well be
warranted later this year," though the Fed was at the time giving
"serious consideration" to making the move.
Investors globally are attempting to predict when the Fed will
modestly tighten policy. Most economists point to September, while
traders in futures markets held firm on December.
Ahead of a three-day U.S. holiday weekend, Treasury yields hit
session highs after Yellen spoke on Friday, and short-term interest
rate futures extended losses, hitting session lows. U.S. stocks were
largely flat.
"This is probably the most telegraphed Fed lift-off in some time,"
said Bruce Zaro, chief technical strategist at Bolton Global Asset
Management. "I think they're concerned about the market's reaction -
they don't want to have a period of volatility that causes the
market to react in a crash-type form."
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Yellen, however, struck some familiar dovish chords, noting that the
"generally disappointing pace of wage growth ... suggests that the
labor market has not fully healed."
She said less progress had been made on lifting inflation, though
she said the Fed believes it will rise to the central bank's
medium-term 2 percent goal as oil prices rebound and other temporary
factors dissipate.
"With the waning of the headwinds ... the U.S. economy seems
well-positioned for growth," Yellen said, predicting "moderate"
employment and output growth this year and beyond.
She also reinforced the notion that rate hikes will depend on
incoming economic data and that the tightening process, once it
begins, is likely to be gradual.
"Yellen believes the economy is improving and that the Fed will
raise rates this year," said Wayne Kaufman, chief market analyst at
Phoenix Financial Services. "It is just waiting for the right data
to do that."
(Reporting by Michael Flaherty and Jonathan Spicer; Additional
reporting by Howard Schneider in Washington and the New York markets
team; Editing by Paul Simao)
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