U.S. Federal Reserve Chairwoman Janet L. Yellen told the House Financial Services Committee on Tuesday, that the central bank may push forward with increasing interest rates from near-zero levels later this year, contingent on a few variables being met.
Delivering her semi-annual report in front of Congress, Yellen said that the Fed may hike interest rates before inflation increases, provided that price appreciation speeds up and the job market continues improving. Yellen said in prepared remarks that the Fed would want inflation move closer to its annual threshold of 2 percent “over the medium term” before the central bank pushes on with any rate hike. When asked to clarify the language she used, Yellen explained that Fed decision makers believe inflation will be at 1.7 percent to 2 percent by the end of 2016, or an increase from calendar 2015’s end-of-year forecast of 1 percent to 1.6 percent.
There were a lot of tense moments during the Fed Chair’s hearing, as House Republicans persistently grilled Yellen, pushing for a more hands-on approach to how it oversees the central bank’s activities. “During the most successful periods of our Fed’s history, the central bank appeared to follow a clear rule, methodology or monetary policy convention,” said Financial Services Committee Jeb Hensarling (R-Tex.) at the hearing. “Today, however, it favors a more unpredictable and somewhat amorphous forward guidance, which creates uncertainty.”
In response, Yellen fired back, saying that she is not in favor of any legislation that would require the Fed to make any interest rate increases purely contingent on inflation statistics and other economic trends. “I don’t believe the Fed should chain itself to any mechanical rule,” she postulated, saying that such “mechanical rules” typically “would not take into account a wide range of factors that impact the performance over time of the economy.” Hensarling was quoted as saying that Yellen had flip-flopped on previous statements claiming she could back his proposal, but Yellen replied that she has always been against such a plan.
In 2014, Representatives William P. Huizenga (R-Mich.) and Ernest S. (Scott) Garrett (R-N.J.) introduced a bill that would require the Fed to follow strict monetary policy stipulations. These Republicans and others have not been happy with how the Fed decides on interest rates in private and without any insight from the Congress. They also insist that the Fed has kept overnight rates at near-zero for much longer than anticipated. However, the bill still allows the Fed to backtrack on any established rule, provided it sufficiently explains to Congress the reasons it is doing so.
With regards to employment statistics, Yellen said in her testimony that the U.S. labor market “has been improving along many dimensions.” She pointed out how the unemployment rate has dropped from 10 percent during the throes of the global recession in 2009 to a more manageable 5.7 percent as of last month. Further, she added that the number of long-term unemployed individuals has “declined substantially,” and there are also less part-time workers who would rather work at a full-time job. Yellen also acknowledged that there is still “room for further improvement,” as there are still many Americans who do not actively look for jobs and wage growth remains slow.
The majority of economists and financial strategists predict that the Fed will increase overnight interest rates, which have been at near-zero since late 2008, by June 2015 at the earliest.