Federal Reserve Chair Janet Yellen on Friday said she expected the central bank to raise interest rates this year, as the U.S. economy was on course to bounce back from a sluggish first quarter and headwinds at home and abroad waned.
Yellen spoke amid growing concern at the Fed about possible market volatility once it begins to raise rates, and a desire to begin coaxing skeptical investors towards accepting the inevitable: ending a 6-1/2-year stretch of near-zero interest rates.
In a speech to a business group in Providence, Rhode Island, Yellen said she expected economic data to strengthen, and noted that some of the weakness at the start of the year might be due to “statistical noise.”
While saying the outlook for the economy is always highly uncertain and citing persistently low inflation, Yellen said delaying a monetary policy tightening until employment and inflation hit the central bank’s targets risked overheating the economy.
“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 normalizing monetary policy, Yellen said in a speech at the Providence Chamber of Commerce.
In a speech in March, Yellen signaled that the Fed would likely raise rates this year although she cited concern that a downturn in core inflation or wage growth could delay the central bank’s plans.
She said at the time that the Fed is giving “serious consideration” to beginning to reduce policy accommodation. “With continued improvement in economic conditions, a (rate) increase … may well be warranted later this year,” Yellen said in March.
Yellen’s tone on when the rate lift-off would begin appeared stronger on Friday, as she and other Fed policymakers try to close the gap between the central bank’s view and that of the market.
The run-up to the speech in Providence already was helping accomplish that goal.
Short-term interest rates rose slightly before Yellen spoke on Friday, and investor expectations of when the Fed might begin to hike rates pushed forward, edging from December towards October.
“With the waning of the headwinds … the U.S. economy seems well positioned for growth,” Yellen said on Friday.
Yellen repeated a view she shared in March that once the Fed begins to raise rates, the process is likely to be gradual. She also said the timing of a rate hike will depend on incoming economic data.
“Yellen believes the economy is improving and that the Fed will raise rates this year,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services. “It is just waiting for the right data to do that.”