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Fed's Yellen expects rate hike 'some point this year'

Paul Handley
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Federal Reserve Board Chairwoman Janet Yellen speaks in Washington, DC on May 6, 2015

Federal Reserve Board Chairwoman Janet Yellen speaks in Washington, DC on May 6, 2015 (AFP Photo/Mandel Ngan)

Washington (AFP) - Janet Yellen said Friday she expects the Federal Reserve to begin raising interest rates "at some point this year," saying delaying the long-awaited move risks the economy overheating.

But the Fed chair also stressed the economy still showed weaknesses, with significant job market slack not reflected in the 5.4 percent jobless rate.

The comments came two days after minutes of the Fed's policy board made clear that slow economic growth in recent months meant it was not expecting to increase the benchmark Fed funds rate before late July, despite earlier forecasts of a mid-year hike.

Yellen said she expects the economy to bounce back from the stall in the first quarter, which she attributed to "transitory" factors like severe weather and labor disputes at West Coast ports.

But she stressed that any rate decision needs to be based on clear improvement in the data.

"Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy," she said in a speech to the chamber of commerce in Providence, Rhode Island.

"For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy."

The Fed funds rate has remained locked at zero since the end of 2008 as the Fed has sought to help pull the economy back from the Great Recession.

With growth picking up in the past two years, the central bank has indicated repeatedly it sees this year as the time to bring the rate back toward normal.

But lifting the rate is tied to two key Federal Reserve goals, bring the economy back toward full employment and bringing inflation to around a steady 2.0 percent.

Yellen said that the sharp fall in the jobless rate from the recession high of 10 percent, however, masks continuing weakness in the labor market. She noted that wages are still rising only very slowly, and that many people remained forcibly underemployed.

She pointed to "a significant number" of people not seeking work because they see few good job opportunities, and also to "an unusually large number" of people who say they work part-time because they cannot find full-time jobs.

"I suspect that much of this also represents labor market slack that could be absorbed in a stronger economy," she said, according to the text of her speech.

As for inflation, while the Fed expects it to return to 2.0 percent in the medium term, she voiced disappointment in the progress toward that goal.

"Inflation has been held down by the continued economic weakness during the slow recovery and, more recently, by lower prices of imported goods as well as the fall in oil prices."