Federal Reserve Chair Janet Yellen offered a subtle change to her outlook from less than a week ago, saying she and her colleagues were on watch for whether, rather than when, the U.S. economy would show clear signs of improvement.
“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective,” Yellen said in testimony prepared for delivery Tuesday before the Senate Banking Committee in Washington.
Just six days ago, Yellen said a cautious approach to interest-rate hikes “will allow us to verify” that growth, jobs and inflation are improving.
Yellen, 69, opened two days of semiannual monetary-policy hearings saying that despite her own optimism about the economy’s longer-run prospects, “we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.”
Yellen’s remarks move her closer to the argument made for some time by former Treasury Secretary Lawrence Summers that forces holding down growth and interest rates may be long-lasting. St. Louis Fed President James Bullard, who until recently had taken a more hawkish stance on policy, also shifted his views in a paper published last week suggesting the U.S. economy is stuck in a rut for at least the next two to three years.
Fed policymakers on June 15 left their benchmark interest rate unchanged and signaled their confidence in the economy’s momentum had wavered after payroll growth slowed in April and May. At the meeting, six of the Federal Open Market Committee’s 17 members forecast one quarter-point rate increase this year, compared with one person making such a forecast in March, though the median projection remained at two hikes.
Yellen on Tuesday repeated a message she offered last week that, in the short term, the Fed expects the economy to rebound from a disappointing first quarter, and that she continued to foresee “gradual” rate increases without offering a firm timetable.
Yellen acknowledged a slowdown in hiring, reflected in an especially poor employment report for May, but warned against placing too much emphasis on just a few monthly readings.
“It is important not to overreact to one or two reports, and several other timely indicators of labor market conditions still look favorable,” she said.
Yellen added another positive point, noting that recent data showed a “noticeable step-up in GDP growth in the second quarter.”
Even with a second-quarter rebound, growth in the first half of 2016 isn’t expected to exceed 2 percent on an annualized basis, seven years after the economy emerged from recession. While unemployment has dropped to its lowest since 2007, wages have remained sluggish and inflation below the Fed’s 2 percent target.
The Fed chair mentioned several potential threats to the economy from outside the United States, including those from uncertainty over China’s expansion and from Thursday’s vote in the U.K. over whether to remain in the European Union.
“A U.K. vote to exit the European Union could have significant economic repercussions,” she said, following remarks last week that the upcoming referendum was a factor in the Fed’s decision to keep rates steady.
In its monetary policy report accompanying Yellen’s testimony, the Fed warned that prices in the U.S. commercial real estate market may have run too far too fast. Valuations “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” according to the report.
Overall, Yellen’s message was one of continued caution and uncertainty.
“The FOMC continues to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate,” she said, reiterating language from the committee’s June 15 statement.
Based on prices of federal funds futures contracts before Yellen’s testimony on Tuesday, investors saw only an 8 percent chance of a rate hike when Fed policy makers next meet, on July 26-27.
Yellen is scheduled to appear before the House Financial Services Committee on Wednesday.