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Fed Chair Janet Yellen: Central bank should move ‘cautiously’ in raising rates

March 29, 2016 at 12:20 p.m. EDT

Federal Reserve Chair Janet Yellen said Tuesday that the central bank should move “cautiously” in raising interest rates in the midst of a weak global economy, though she expressed confidence that the U.S. recovery remains on track.

The Fed raised its benchmark interest rate in December for the first time since the Great Recession, a critical milestone in the nation’s economic progress. But after a volatile start to the year that included wild swings in the financial markets, new lows for oil prices and a slowdown in growth abroad, the central bank opted not to raise rates again when officials met in Washington earlier this month.

In her speech before the Economics Club of New York on Tuesday, Yellen said the turmoil means that the Fed will increase rates even more slowly than initially expected.

“Given the risks to the outlook, I consider it appropriate for the [central bank] to proceed cautiously in adjusting policy,” she said, according to prepared remarks.

Her comments suggest the Fed is unlikely to be ready to raise rates again by the time officials meet next in late April. Wall Street cheered that prospect, with both the Standard & Poor’s 500-stock index and the Dow Jones industrial average shifting positive after trading in the red during the morning. The bond market also rallied, pushing down yields on 10-year Treasurys.

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The Fed’s decisions help steer the course of the nation’s economy: Low interest rates can boost the recovery by encouraging consumers and businesses to spend. Higher rates serve to rein in an overheating economy.

But there is substantial debate within the central bank over the conditions necessary to raise rates again. Just last week, Atlanta Fed President Dennis Lockhart indicated he could support a rate hike in April and described recent economic data as “positive.” But Fed Gov. Lael Brainard recently called for patience, arguing the central bank should “protect and preserve” the progress made so far.

Yellen said Tuesday that the Fed can respond to faster inflation and a stronger economy by raising rates more quickly. But it has limited ability to support the recovery if it were to falter or if inflation remained low. That’s because the Fed slashed its benchmark interest rates to zero in the depths of the recession, and it is only slightly above that now.

Central banks in Europe, Japan and other countries confronting this problem have pushed their interest rates into negative territory. Notably, Yellen did not broach that option in her speech Tuesday. Instead, she said that the Fed could promise to keep rates low or increase its already massive balance sheet if it needed to provide more stimulus.

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Yellen also reiterated her skepticism about the recent uptick in inflation, which has been running below the Fed’s target of 2 percent for several years. Recently, several measures have shown a pickup in the pace of price increases -- a development Fed Vice Chair Stanley Fischer said might signal the “first stirrings” of inflation.

But on Tuesday, Yellen said it was “too early to tell.” She noted that inflation data can be volatile and she expects the stronger dollar to weigh on price increases for several months. Yellen also said she was concerned that the financial markets and the public’s inflation expectations had been drifting lower.

Yet she said that would only delay -- not derail -- the Fed’s ability to meet its target. And the longer it takes for inflation to reach 2 percent, the more accommodative the Fed would have to be.

“My baseline assumption of stable expectation is still justified,” she said. “Nevertheless, the decline in some indicators has heightened the risk that this judgment could be wrong.”

Investors are now betting that the Fed will raise rates only once or twice more this year, compared to the four rate increases that the central bank had previously anticipated. Yellen said market expectations of lower interest rates have helped buffer the U.S. economy from the turbulence overseas.

“Such a stabilizing effect is one consequence of effective communication,” Yellen said Tuesday.

The Fed has emphasized that future moves will depend on the performance of economic data -- and that the outlook is particularly cloudy.

“Monetary policy will, as always, respond to the economy’s twists and turns so as to promote, as best as we can in an uncertain economic environment, the employment and inflation goals,” Yellen said.

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