Fed's Yellen sees rate hike 'later this year'

Yellen remained cautious, saying she still saw slack in the jobs market.
Yellen remained cautious, saying she still saw slack in the jobs market.REUTERS

WASHINGTON (AFP) - Federal Reserve chair Janet Yellen reiterated her view Friday that the central bank will likely begin raising interest rates before the end of 2015.

“I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalising monetary policy,” she said in a speech in Cleveland, Ohio.

Yellen, however, remained cautious, saying she still saw slack in the jobs market, which has been a key factor in how the Fed approaches its first rate hike since 2006.

“We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 per cent in the next few years,” she said.

She also stressed that the move toward a tighter monetary policy would be gradual and that Fed policy would need to remain supportive of economic growth “for quite some time.”

The Fed has kept its benchmark federal funds rate at zero since the end of 2008 to help pull the economy back from the Great Recession.

Since early last year the Fed had been expected to move on rates around mid-2015, but the stall in the economy in the first quarter of the year, and the tepid rebound from that, have delayed the decision.

Addressing the City Club of Cleveland, Yellen said that the economy is near the point where it does not need the support of rates at such an extraordinarily low level.

But she made clear that she and other Fed policymakers want to see data over the coming weeks to confirm that.

Even with the US unemployment rate now down to 5.3 per cent, its lowest level since April 2008, she said there was still some slack in the US jobs market.

“It is my judgment that the lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labour market – in other words, how far away we are from a full-employment economy,” she said, according to her prepared remarks.

She pointed to the very low level of participation in the active work force, the high number of people in part-time jobs, and the relatively slow pace of hiring.

On the other hand, while wage growth, a key sign of the tightness of the labour market, has been weak, she noted “tentative hints of a pickup” that could point to more firm gains in the jobs market.

Even so, she said, “I think a significant number of individuals still are not seeking work because they perceive a lack of good job opportunities, and that a stronger economy would draw some of them back into the labour force.”

She also noted continuing weakness in business investment and residential construction.

And she said that Greece’s economic crisis adds to uncertainty about the economic outlook.