Yellen’s Semiannual Report to the Congress: Rate Decision Depends On Incoming Data

The Federal Reserve Chair Janet Yellen presented the Fed’s semiannual Monetary Policy Report to the Congress this morning. In her testimony, Yellen stressed the uncertainty in the economic outlook and the risks to growth. She also reiterated that the increases in the federal funds rate would be gradual and “will depend on what incoming data tell us about the economic outlook”.

On the economic situation, Yellen summarized the progress in the labor market: the unemployment rate fell to 4.9% in January, first time below 5% since 2008. Nonfarm payroll jobs increased 150,000 in January and 2.7 million in 2015. She stated that there is still room for more sustainable improvement in the job market. In addition, more economic activities were seen last year and the U.S. real GDP growth in 2015 is estimated at about 1.75%.

Despite the improvement in both the labor market and economic activities, Yellen acknowledged that the financial conditions in the US “have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar”. Moreover, she pointed out the risks in the global economy that might affect the economic growth in the US, including the uncertainty about China’s economy and its exchange rate policy as well as low commodity prices that “could trigger financial stresses in commodity-exporting economies”. She said that “the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the labor market and inflation and the balance of risks to the outlook”.

Regarding inflation, Yellen claimed that “the committee expects inflation to remain low in the near term” because of the low commodity prices and appreciation of the dollar. However, she expects the inflation to “rise gradually to 2 percent over the medium term”.

On the monetary policy, Yellen stressed that the increase in the federal funds rate would be “gradual” and depending on incoming data and economic outlook in order to make sure it is consistent with the 2% inflation goal while maximizing employment.

“ In particular, stronger growth or a more rapid increase in inflation than the Committee currently anticipates would suggest that the neutral federal funds rate was rising more quickly than expected, making it appropriate to raise the federal funds rate more quickly as well. Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with the attainment of our objectives over time.” 

In December, the Fed ended the zero-rate era by raising the federal funds rate for 0.25%, setting the new target at 0.25% to 0.5%.

US stocks rise today with NASDAQ and NYSE up for 1.26% and 0.42% respectively as of this writing.

 

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