WASHINGTON (Sputnik) — The US Federal Reserve is likely to gradually increase interest rates later in 2015, Federal Reserve Chairperson Janet Yellen said.
“The [Federal Open Market] Committee's decision about when to begin reducing accommodation will depend importantly on how economic conditions actually evolve over time,” Yellen stated on Friday.
“I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” she added.
Yellen explained the Federal Reserve would watch labor market trends to reach maximum employment and inflation in order to determine when to raise interest rates from historically low levels.
She noted, however, the Federal Reserve may raise interest rates before reaching maximum employment and the 2 percent inflation target because the full effects of monetary policy are felt after a lag.
Unemployment rates have dropped from nearly 10 percent at the height of the 2008 recession to 5.5 percent today, slightly above the Federal Reserve’s 5.0 to 5.2 percent target range, while wage gains remain sluggish.
Yellen said that despite moderate economic growth she is “cautiously optimistic” labor conditions would improve.
Inflation has been low in the United States despite accommodating monetary policy and historically low interest rates, highlighting another factor the Federal Reserve will watch in developing monetary policy.
“While there has been considerable progress on the maximum employment leg of our dual mandate, progress on the price stability leg has been notably absent,” Yellen explained.
Inflation as measured by the price index for personal consumption expenditures has been running below the Federal Open Market Committee’s longer-run goal of 2 percent for a number of years, and on a 12 month basis is currently 1/4 percent,” she noted.
The US economy has experienced moderate growth, but Yellen said employment and economic growth came against the backdrop of six years of “extraordinary monetary accommodation.”
“While the overall level of real activity now appears to be much closer to its potential than it was a year or two ago, the economy in an underlying sense remains quite weak by historical standards,” Yellen said, adding the Federal Reserve would raise, maintain or reverse rate changes in response to economic data.
Any rate increase, Yellen emphasized, would be gradual.
The Federal Open Market Committee is charged under US law to oversee market operations, the main tool used to influence overall monetary and credit conditions, including meeting regularly to establish interest rates.
