Federal Reserve chairman Janet Yellen is hinting at an interest rate hike this year and a cautious approach to subsequent increases to keep borrowing costs low for years to come.
Yellen said the United States economy continues to heal from the worst recession since the Great Depression and the coming tightening cycle will be unlike any other in recent times.
“The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation,” she said
Yellen said strong gains in labor markets are a sign that the multiple restraints on the post-recession economy are slowly abating and that means the benchmark interest rate should rise.
Fed officials have kept the rate at zero since December 2008 and opened the door to an increase as early as June at their meeting this month.
“I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Yellen said.
But unlike previous tightening cycles when rates followed a predictable, stair-step pattern, the rate hike will be responsive to incoming data, paying heightened attention to “special risks”.
Yellen also played down the importance of timing when the Fed finally raises rates for the first time in nine years.
“What matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase,” she said.
Treasuries remained higher after Yellen’s speech and a report earlier in the day showing the economic expansion in the fourth quarter was weaker than forecast.
The 10-year yield fell three basis points, or 0.03 percentage point, to 1.96 percent.
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