By Jon Hilsenrath And Jeffrey Sparshott
Federal Reserve Chairwoman Janet Yellen said the central bank is
on track to raise interest rates this year but will likely proceed
cautiously because the job market hasn't fully healed, inflation is
low and growth has again disappointed.
It could be "several years," she said Friday, before the Fed's
benchmark short-term rate is back to a level the central bank
considers to be normal in the long-run. Fed officials have held the
rate near zero for more than six years and see it getting to 3.75%
someday. Their March forecasts showed that even at the end of 2017,
they expected the rate to still be below that level.
The Fed expects economic growth to pick up in the months ahead.
Her speech in Providence, R.I. came a few hours after the Labor
Department reported signs inflation is stabilizing, which should
give the central bank more confidence about the economy's
strength.
The consumer-price index rose for the third consecutive month in
April, reversing a three-month slide largely associated with
falling energy prices. Consumer prices were still lower than they
were a year ago after the earlier declines, but underlying
inflation outside of the volatile food and energy sectors has
stabilized. That could be a sign that broader consumer-price
declines have run their course and that the economy, even after a
weak first quarter, is not in a deepening slump.
Fed officials don't want inflation too high, because it eats
away at consumer purchasing power. But they also don't want it too
low, because that signals broader weakness in demand in the economy
for consumer goods. The Fed's goal is 2% inflation and their
preferred measure of it, the Commerce Department's personal
consumption expenditures price index, has been running below that
goal for nearly three years.
The Fed has said officials want to be "reasonably confident"
that inflation will move back to 2% over the medium term before
taking an initial step on rates.
"Where does [Friday's] data leave the Fed? Certainly another
step closer to liftoff," said Stephen Stanley, chief economist at
Amherst Pierpont Securities, referring to the time of the central
bank's first rate increase in nearly 10 years.
Ms. Yellen's speech before the Greater Providence Chamber of
Commerce, made just a few weeks before the Fed's next policy
meeting June 16-17, were the latest indication the central bank is
unlikely to start raising its benchmark rate at that gathering but
could do so later in the year if the economy gains steam.
"I think it will be appropriate at some point this year to take
the initial step to raise the federal-funds rate target and begin
the process of normalizing monetary policy," Ms. Yellen said in
Friday's speech.
Many investors expect the first Fed rate increase in September.
Minutes from the central bank's April policy meeting showed that a
move at the June meeting was unlikely.
Ms. Yellen made clear Friday that because of the cloudy economic
outlook, the Fed will be in no hurry to raise rates after that
initial increase. "The [Fed's] objectives of maximum employment and
price stability would best be achieved by proceeding cautiously,"
she said.
The job market, she argued in her speech, wasn't back to full
strength. Even though the unemployment rate has dropped to the
relatively low level of 5.4% in April, it "probably does not fully
capture the extent of slack" in the economy, she said.
Many people have dropped out of the labor market, discouraged
about their prospects and others are working in part-time jobs when
they want full time employment. "The generally disappointing pace
of wage growth also suggests that the labor market has not fully
healed," she said.
"Even with the significant gains in the past couple of years, it
is only now, six years after the recession ended, that the labor
market is approaching full strength," she said. "I say
'approaching' because in my judgment we are not there yet."
Despite the headwinds and disappointments, households are
benefiting from more jobs and the drop in oil prices is a boost to
household incomes, worth about $700 per household, Ms. Yellen
noted.
Fed officials projected in March that the economy would grow at
a pace around 2.5% this year and next. They will update those
forecasts at their June meeting.
Ms. Yellen noted that Rhode Island was hit hard in the 2007-09
recession and has seen slow and incomplete progress since then.
That was a fair assessment, said Laurie White, president of the
Greater Providence Chamber of Commerce, which hosted the
speech.
"Our state has lagged in terms of recovery," Ms. White said in
an interview. But she also pointed to the recent drop in
joblessness--the state's unemployment rate in March was 6.3%, down
from 8.2% a year earlier--among other reasons for hope. "There is a
palpable feeling that we're breaking out of this malaise in Rhode
Island," she said.
Likewise, headwinds to national economic growth have abated but
haven't disappeared. On Ms. Yellen's list of forces holding back
the expansion, she added a new factor that is getting increased
attention inside the U.S. central bank: China, the world's
second-largest economy, is slowing, with uncertain effects on the
rest of the world.
"Initially the euro-area crisis was the biggest headwind coming
from the rest of the world," Ms. Yellen said, referring to
turbulence in the countries that use the euro. Now, she noted,
"growth in many other parts of the global economy, including China
and some other emerging market economies, has slowed.
Weak growth abroad, together with its accompanying implications
for exchange rates, has dented U.S. exports and weighed on our
economy."
Ben Leubsdorf in Providence, R.I., contributed to this
article.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Jeffrey
Sparshott at jeffrey.sparshott@wsj.com