Even as a number of indicators point to better economic times ahead, the chairwoman of the Federal Reserve, Janet Yellen, reiterated on Wednesday that she expected interest rates to remain very low until the recovery is on a more secure footing and the American economy is more fully involving available workers and other resources.
In one of her first major public speeches since assuming the top job at the Fed in February, Yellen said that while ?the recovery has come a long way? ? citing a rebounding housing sector and a resurgent auto industry as examples ? a robust and healthy job market still appeared to be ?more than two years away.?
As a result, she said, the central bank believed that ?economic conditions may, for some time, warrant keeping short-term interest rates below levels? that are ?likely to prove normal in the longer run.? Her speech seemed intended, in part, to clarify her remarks last month during her first news conference as Fed chairwoman that suggested the central bank might begin to lift rates as early as the middle of 2015. In her speech, which was given to the Economic Club of New York, Yellen also said that the risk of inflation rising above the Fed?s 2% target remained less of a threat than the danger posed by too little inflation. She emphasised that even as the headline unemployment rate, now at 6.7%, has been falling, other measures of the job market?s health ? like the number of people forced to take part-time positions because they can?t find full-time work, the still-sizable ranks of the long-term unemployed and the proportion of the population that has dropped out of the work force entirely ? all point to weakness.
Optimism about the economy?s prospects has increased in recent weeks, with some experts arguing that the end of an unusually cold and icy winter will encourage more retail activity, hiring and construction in the months ahead, after a weak patch at the end of 2013 and the very beginning of 2014. Yellen said she and fellow Fed policy makers shared that basic outlook and ?generally believe that a significant part of the recent softness was weather-related.?
Throughout her speech and in the question-and-answer session afterward, Yellen emphasised that under her watch, the Fed must remain nimble enough to respond to what she called the ?twists and turns? of a still-recovering economy, noting unexpected roadblocks in recent years like the sovereign debt crisis in Europe and large federal budget cuts in Washington.
?So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years,? she said. ?And the labour market is behaving in some perplexing ways and showing patterns that are novel.?
Shortly after Yellen finished her remarks, the Federal Reserve released its April survey of economic activity in its 12 districts around the country, noting that there had been a pickup in most areas. In particular, the Fed reported, ?Consumer spending increased in most districts, as weather conditions improved and foot traffic returned.?
There were some other encouraging signals from the Fed earlier on Wednesday, with better than expected data on industrial production in March, and the highest reading for capacity utilisation among companies in nearly six years.
Yellen?s remarks on monetary policy, the signs of a spring thaw in the Fed?s survey and the robust manufacturing data all helped to push stocks sharply higher in later trading. The Standard & Poor?s 500-stock index and the Dow Jones industrial average both rose about 1%, while the tech-heavy Nasdaq composite index, which has dropped sharply recently, rebounded by 1.3%
?Meaningful progress has been made toward recovery,? said Michael Darda, chief economist at MKM Partners. ?Although this business cycle has been slow, it has been steady.?
While more hawkish policy makers and some prominent economists have worried aloud that a prolonged period of loose monetary policy, with short-term interest rates near zero, might ultimately unleash too much inflation, Yellen seemed to offer a pointed rejoinder to this group.