WASHINGTON — Janet L. Yellen, the Federal Reserve chairwoman, told Congress on Tuesday that the central bank is pleased with recent economic growth but convinced there is room for improvement and still pondering when to start raising interest rates.
Janet L. Yellen, the Federal Reserve chairwoman, said at a congressional hearing that the Federal Reserve was in no hurry to raise interest rates.
Video by Reuters on Publish Date February 24, 2015. Photo by Stephen Crowley/The New York Times.
In testimony before the Senate Banking Committee, Ms. Yellen advanced the Fed’s slow-motion retreat from its stimulus campaign. She said the next step would be an announcement, which could come as soon as March, that the Fed would begin to consider raising its benchmark rate at each policy-making meeting.
The change would preserve the possibility of a rate increase as soon as June. But Ms. Yellen emphasized that patience remained the Fed’s watchword, and that the persistence of sluggish inflation might still push back the timing of the liftoff.
There has been important progress, Ms. Yellen testified. However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective.
The ambiguity drew gentle prodding from Republicans concerned that the Fed would move too late and from Democrats worried about a premature retreat.
Senator Richard C. Shelby, the Alabama Republican who leads the banking committee, questioned whether the Fed, by continuing to suppress borrowing costs, was blowing bubbles into financial markets and risking higher future inflation.
Many question whether the Fed can rein in inflation and avoid destabilizing asset prices when the time comes to unwind its massive $4.5 trillion balance sheet, he said. Patience, he warned, could lead to a more painful correction down the road.
Senator Sherrod Brown of Ohio, newly installed as the committee’s ranking Democrat, countered that concerns about inflation were misplaced.
Some pundits and politicians for years have been predicting runaway inflation, but they clearly do not have a very good grasp of what is happening for most Americans, Mr. Brown said. Low wage growth has continued for the majority of Americans, and the declining participation in the work force is troubling.
Ms. Yellen said the Fed was trying to balance both concerns.
We do have an economy that fortunately appears to be recovering, and we have to be forward-looking in setting monetary policy, but I want to assure you that we do want to see that recovery continue, Ms. Yellen said. She said that policy was very accommodative — and would remain so even as the Fed started to raise rates.
Much of the hearing was devoted to legislative proposals aimed at reducing the Fed’s autonomy, particularly the Audit the Fed bill championed by Senator Rand Paul of Kentucky, a Republican, which would task the Government Accountability Office with conducting regular reviews of the central bank’s making of monetary policy.
Ms. Yellen had clearly prepared to address the proposal, which she described as misleading and harmful. She brandished a copy of the Fed’s audited financial statements to make the point that the central bank already was audited. And she questioned whether such oversight would have discouraged Paul Volcker when he was Fed chairman in the 1980s from raising interest rates to bring inflation under control, a campaign now widely regarded as one of the central bank’s seminal achievements.
I really wonder whether or not the Volcker-led Fed would have had the courage to take the hard decisions necessary to bring down inflation and get that finally under control, Ms. Yellen told the panel. I wonder if that would have happened with G.A.O. reviews in real time of monetary policy decision-making.
Senator Bob Corker, a Tennessee Republican, joined Ms. Yellen in criticizing the proposal as allowing Congress to meddle with monetary policy.
Mr. Shelby, however, while not endorsing the specific proposal, said the Fed should be subject to additional oversight by Congress and further reforms. He said the panel would hold a hearing next week to discuss proposals.
During the hearing, Ms. Yellen offered an upbeat assessment of the economic recovery, echoing the statement the Fed issued after the most recent meeting of the Federal Open Market Committee, its policy-making arm, in January.
There is reason, I think, to feel good about the economic outlook, she said.
She noted considerable progress in the labor market, and she said the collapse of global oil prices appeared to be a significant overall plus for the United States economy, supporting increased consumer spending.
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, Ms. Yellen said.
Ms. Yellen cautioned that the weakness of other developed economies could slow growth in the United States. On the other hand, she said, recent efforts by policy makers in those countries — including the stimulus campaign announced by the European Central Bank — could bolster the domestic economy.
Some Fed officials expressed concern at the Fed’s most recent meeting in January about sluggish inflation and the decline in measures of inflation expectations. Just as too much inflation can disrupt economic growth, so can too little.
The Fed has maintained an official view that the weakness is a temporary affair, but it has appeared less firm in its conviction of late. Ms. Yellen continued the trend, prefacing the house view with the words, as best we can tell.
The strength of inflation has become the decisive factor in the course of Fed policy. The Fed judges that the jobs market is strong enough to withstand higher interest rates, but Ms. Yellen reiterated that it would not raise rates until it was reasonably confident that inflation would rise back to the Fed’s 2 percent annual goal.
The debate is now about what would make the F.O.M.C. confident enough in their forecast, said Stuart Hoffman, chief economist at PNC Financial. Most participants agree that a strong growth and employment outlook is a necessary condition. The question, he said, is whether to wait for tangible evidence of wage or price growth.
Ms. Yellen has pointed to the slow pace of wage growth as evidence that the labor market still has not returned to full health. But she cautioned on Tuesday that the Fed would not necessarily wait for wage growth to accelerate before raising interest rates, because wage growth often lags other kinds of growth.
Referring to the labor market, she said, We have seen improvement, and if we continue to see improvement, it would add to my confidence, especially as the impact of oil prices diminishes over time, that inflation will be back up.
