Federal Reserve

Yellen says not wise to keep monetary policy on hold until inflation hits 2 per cent

PUBLISHED : Wednesday, 27 September, 2017, 1:31am
UPDATED : Wednesday, 27 September, 2017, 1:31am

Federal Reserve Chair Janet Yellen said raising interest rates gradually is the most appropriate policy stance now at a time of higher uncertainty about inflation.

“It would be imprudent to keep monetary policy on hold until inflation is back to 2 per cent,” she said on Tuesday in Cleveland. In addition, she said the Fed “should also be wary of moving too gradually.”

US central bankers are monitoring progress on their 2 per cent inflation goal, which they have mostly missed for the past five years. Nonetheless, the Fed’s quarterly forecasts released last week continued to show most members projecting one additional rate hike this year and three more in 2018.

Yellen, in her most detailed speech on inflation risks this year, described three areas of uncertainty in the inflation outlook. “My colleagues and I may have misjudged the strength of the labour market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” she said.

Discussing each of these risks, Yellen said it’s possible that some slack in the labour market remains.

“If so, the economy could sustain a higher level of employment and output in the longer run than now anticipated – a very beneficial outcome, albeit one that would require recalibrating monetary policy over time to reap those benefits and compensate for the accompanying reduction in inflationary pressures,” she said in the text of her remarks at the economics conference.

Yellen said the messages from survey and market measures of inflation expectations are mixed. Another risk, she added, is that there are underlying changes in firms’ and consumers’ behaviour that are keeping prices low. Those forces range from foreign competition, to the growing importance of global supply chains in the production of goods, to online shopping.

US Federal Reserve keeps rates flat but hints at one more increase by year’s end

Given all the uncertainties, Yellen said the policymakers will have to remain agile and be prepared to change their interest-rate assumptions.

“My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it,” she said.

Whatever strategy Yellen is putting forward now could be subject to change if President Donald Trump alters the leadership of the Board of Governors.

Yellen’s term as chair ends in February, and vice-chairman Stanley Fischer will depart the central bank next month.