WASHINGTON (7/16/14)--If the economy continues to exceed expectations, the Federal Reserve may inflate interest rates higher and sooner than previously planned, Janet Yellen, Federal Reserve chair, told the Senate Banking Committee Tuesday.
In her Semiannual Monetary Policy Report, Yellen said the economy continues to gain on the Fed's long-term objectives for maximum employment and price stability, which could signal that the time to roll back the various tools it has used to support the national economy, such as maintaining low short-term interest rates, is drawing near.
Yellen hedged, however, as she said if the economy were to instead weaken in the coming months, the timeline for such a move could likewise be prolonged.
"Further important progress has been made in restoring the economy to health and in strengthening the financial system," Yellen said. "Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all the necessary financial reform initiatives have been completed."
For the rest of this year interest rates will remain low, Yellen said, as the economic recovery is "not yet complete."
"A high degree of monetary policy accommodation remains appropriate," Yellen said (The Wall Street Journal July 15). Most experts believe the Fed won't raise interest rates until early to middle 2015.
Nonfarm payroll employment averaged an increase of about 230,000 jobs per month through the first half of the year, a slight improvement over the pace seen in 2013, Yellen said.
Further, the unemployment rate has dropped nearly 1.5% over the last 12 months, and in June fell to 6.1%.
Yellen said even with the recent declines, "the unemployment rate remains above Federal Open Market Committee participants' estimates of its longer-run normal level."
The Fed chair also noted that the housing sector has stumbled of late.
"While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing," Yellen said.
Yellen will deliver her remarks on the semiannual report to the House Financial Services Committee today.