Janet Yellen has staked her tenure as chair of the Federal Reserve on a simple principle: she’d rather fight inflation than another economic downturn.
Interviews with current and former Fed officials indicate that Yellen and core decision-makers at the US central bank are determined not to raise interest rates too early and risk hurting the fragile US economy, Reuters reported Wednesday.
It’s a commitment that will be vigorously tested in coming months as pressure builds inside the Fed, among Republicans on Capitol Hill, and perhaps even in financial markets, for the Fed to acknowledge a strengthening US economy with its first interest-rate increase in more than eight years.
A global central bankers’ conference in Jackson Hole, Wyoming next week will give Yellen a major stage on which to press her case.
Yellen has so far been able to forge consensus statements that have satisfied the Fed hawks most concerned about the inflation threat while keeping the central bank focused more on employment.
The nightmare scenario she wants to avoid is hiking rates only to see financial markets and the economy take such a hit that she has to backtrack.
Until the Fed has gotten rates up from the current level near zero to more normal levels, it would have little room to respond if the economy threatened to head into another recession.
Inflation, on the other hand, is a familiar foe that Fed officials say they are confident they can control with conventional policy tools.
“The Fed knows how to contain inflation if it is moving,” said David Stockton, the Fed’s chief economist until 2011 who is now a senior fellow at the Peterson Institute for International Economics. But the impact at this point of another downturn is “more uncertain and hard to counter”.
The risks of moving too soon, Stockton and others in and outside the Fed say, include snuffing out an already tepid housing market recovery with higher mortgage rates, depressing business investment and durable goods purchases, and triggering sudden declines in asset prices.
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