Fed Chair Yellen: Sluggish US economy still needs help
WASHINGTON (AP) — The U.S. economy still isn’t healthy enough to grow at a consistently strong pace without the Federal Reserve’s help.
That was the message Fed Chair Janet Yellen sent June 18 at a news conference after the central bank ended a two-day policy meeting.
Yellen made clear that despite a steadily improving job market and signs of creeping inflation, the Fed sees no need to raise short-term interest rates from record lows anytime soon.
Her remarks followed a statement from the Fed that it would further slow the pace of its long-term bond purchases. The bond purchases have been intended to keep long-term loan rates low. But the Fed offered no clear signal about when it will start raising its benchmark short-term rate.
Stock investors appeared pleased with the message that rates would remain low. Major stock indexes surged more than half a percentage point, with the Standard & Poor’s 500 index reaching a record. And the yield on the 10-year Treasury note dipped to 2.59 percent from 2.65 percent late June 17.
“The last thing that Janet Yellen wants is for the market to think she’s anywhere close to tightening,” said David Robin, managing director at the brokerage Newedge. “She nailed it.”
Most economists think a rate increase is at least a year away despite signs of rising inflation. At her news conference, Yellen downplayed inflation concerns.
Recent inflation figures are “noisy,” Yellen said. Her comment signaled that the Fed doesn’t see high inflation as a risk that it would soon need to combat by raising interest rates.
David Jones, chief economist at DMJ Advisors, said the Fed and Yellen made plain that the central bank still intends to keep rates low for a considerable time.
“The Fed is saying the economy still needs help and that inflation is not a threat at the moment,” Jones said. “Yellen is a lot more worried at the moment about how the job market is behaving than how inflation is behaving.”
At her news conference, Yellen declined to say whether she was “confident” about stronger economic growth coming.
“Because there is uncertainty,” she said.
She then enumerated why the economy should accelerate eventually: Credit is easing. Households are repaying debts. The federal government is exerting less of a drag on growth. The job market is strengthening. Home prices are rising. Stock prices are up. And the global economy appears to be improving.
“All of those things ought to be working to produce above-trend growth,” Yellen said.
They haven’t so far, five years after the Great Recession officially ended. A fierce winter caused the economy to shrink during the first three months of the year, putting it on a path similar to the meager 1.9 percent growth of 2013, according to its updated forecasts the Fed released June 18.
Pay is scarcely managing to keep up with even low inflation. And a high percentage of the unemployed — 35 percent — have been out of work for six months or more.
Referring to the long-term unemployed, Yellen noted: “It is conceivable that there’s some permanent damage there, too, to them, to their own well-being, their family’s well-being and the economy’s potential.”
The statement the Fed issued June 18 was nearly identical to the one it released after its last meeting in April. It reiterated its plan to keep short-term rates low “for a considerable time” after it ends its bond purchases.
It also downgraded its forecast for growth for 2014, acknowledging that the harsh winter caused the economy to shrink in the January-March quarter. In addition, the Fed barely raised its forecast for inflation.
The Fed expects growth to be just 2.1 percent to 2.3 percent this year, down from 2.8 percent to 3 percent in its last projections in March. It thinks inflation will be a slight 1.5 percent to 1.7 percent by year’s end, near its earlier estimate. It foresees the unemployment rate, now at 6.3 percent, dipping to between 6 percent and 6.1 percent by the end of this year. That’s a slight improvement from the Fed’s forecast in March, when it predicted that unemployment would be as high as 6.3 percent at year’s end.
The Fed’s decision to further pare its bond buying means its monthly purchases of long-term bonds will be reduced from $45 billion to $35 billion starting in July. It marked the fifth cut in the purchases since December as the Fed slows the support it’s providing the economy. The bond buying is expected to end altogether by fall.
The Fed’s statement was approved on an 11-0 vote, with support from the Fed’s three newest members: Vice Chairman Stanley Fischer, board member Lael Brainard and Loretta Mester, the new president of the Fed’s regional bank in Cleveland.
The slight changes in the Fed’s statement pointed to signs of a strengthening economy now that a brutal winter has passed. The statement said economic activity had “rebounded,” with gains in the job market, household spending and business investment. The statement signaled no concern about the recent acceleration in inflation. It repeated language in which the Fed said it was still concerned that inflation remained below its 2 percent target.