Federal Reserve Chairwoman Janet
Yellen indicated Monday that the era of extremely stimulative monetary policy
was coming to an end.
In a public discussion at the
University of Michigan, Ms. Yellen said the Fed was moving away from its
efforts to revive a recession-scarred economy and focusing instead on
maintaining the gains of the past few years. That will change the central
bank’s policy-making stance, she said, noting that Fed officials plan to
continue gradually raising interest rates unless the economy begins to
deteriorate.
“Where before we had our foot
pressed down on the gas pedal trying to give the economy all the oomph we
possibly could, now [we’re] allowing the economy to kind of coast and remain on
an even keel,” she said. “To give it some gas, but not so much that we’re
pressing down hard on the accelerator.”
That means the Fed’s benchmark
short-term interest rate will continue to move up to its long-term average, she
said.
Fed officials raised rates in
March for only the third time since the financial crisis, to a range between
0.75% and 1%. But they have penciled in two more rate increases this year,
followed by three in 2018. They are also considering reducing the Fed’s $4.5
trillion portfolio of cash and securities, acquired during three rounds of
asset purchases aimed at lowering long-term borrowing costs after the
recession.
Ms. Yellen said the Fed is “doing
pretty well” in meeting its congressionally mandated goals of low and stable
inflation and a full-strength labor market.
In February, inflation rose 2.1%
over the previous year after running below the Fed’s 2% target for almost five
years. Meanwhile, the unemployment rate fell to 4.5% in March—below what the
Fed considers a sustainable long-term average.
Overall, Ms. Yellen said the
economy had been growing “at a moderate pace.”
Fed officials expect it will take
until 2019 for interest rates to rise to their long-term sustainable level. But
even then, the bank’s benchmark federal-funds rate will only end up around 3%,
lower than in the past because of long-term changes to the U.S. economy.
That lower long-term interest
rate has led some economists and policy makers to consider letting inflation
rise above the 2% target to give officials more room to raise rates higher
during good economic times and drop them during periods of recessions. San
Francisco Fed President John Williams has proposed studying raising the
inflation target.
Ms. Yellen suggested Monday that
she preferred to hold the goal at 2%, largely because that is the level that
markets and consumers expect.
“Evidence suggests that the
population roughly expects inflation in the vicinity of 2%,” she said. “We’re
focused on making sure that inflation expectations and actual inflation stay
very well anchored.”
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