Yellen Sees Rate Rise in 2015, Gradual Pace of Tightening Later

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Yellen Sees Rate Rise in 2015, Gradual Pace of Tightening Later
by Jeff KearnsJeanna SmialekCraig Torres
1:00 PM EDT May 22, 2015
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Federal Reserve Chair Janet Yellen said she still expects to raise interest rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.
While the labor market is nearing full strength, “we are not there yet,” she said Friday in a speech prepared for delivery in Providence, Rhode Island.
“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,” she said.
Even after the first rate increase since 2006, “I anticipate that the pace of normalization is likely to be gradual,” Yellen, 68, said.
Echoing the Fed’s April statement, Yellen said she expects the economy to return to a “moderate” pace of growth after a disappointing first quarter as headwinds including a cooling global economy gradually abate.
Yellen repeated that policy isn’t on a pre-set course and the Fed may tighten more quickly if the economy performs better than expected or raise rates at a slower pace if it disappoints. Delaying the first rate increase until employment and inflation return to the Fed’s objectives “would risk overheating the economy,” Yellen said.
She also repeated the Fed’s two criteria for raising rates, which have been kept near zero since December 2008: “I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.”
Policy makers expect growth to pick up after stalling in the first quarter, even as they fret about the strength of the consumer spending that makes up two-thirds of the economy, minutes of their April meeting released Wednesday show.
Yellen said it will be best to proceed “cautiously,” which means taking “several years” before policy makers lift the federal funds back to its normal, longer-run level.
Even after significant employment gains, the labor market “is approaching its full strength,” though still short of it, Yellen said. While the U.S. is nearing what many economists say is full employment, the jobless rate “probably does not fully capture the extent of slack in the labor market,” she said.