US Fed chief sees gradual rate hikes starting 2015

US Federal Reserve Chair Janet Yellen signalled that the US central bank will likely start raising interest rates later in 2015, even before inflation and wages have returned to health, but emphasised that the return to normal interest rates will be gradual.

A downturn in core inflation or wage growth in US could force the Federal Reserve to delay the increase to borrowing costs, the first since 2006, Yellen said on Friday, but policymakers should not wait for inflation to near the Fed’s 2-per cent goal before tightening monetary policy. The US Fed has held short-term borrowing costs near zero since December 2008.

After the first rate hike, Yellen said, a further, gradual tightening in monetary policy will likely be warranted. If incoming data fails to support the US central bank’s economic forecast, the path of policy will be adjusted, the Fed chief said.

“With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year,” Yellen said at a monetary policy conference at the Federal Reserve Bank of San Francisco.

She added that while the US Fed is giving “serious consideration” to beginning to reduce its accommodative monetary policy, the timing and the path of a Fed hike would depend on the incoming economic data.

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“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,” Yellen said.

US Treasury yields fell and held near session lows on Friday after the mildly hawkish comments and as investors bought bonds ahead of month-end rebalancing.

Still, traders of US rate futures kept their bets that the US central bank will wait until October to raise rates.

“It turned out to be pretty much a replay” of last week’s US Fed statement, said Alfonso Esparza, senior currency Strategist at Oanda in Toronto. “They’re waiting for the data,” Esparza said in reference to Fed policymakers.

With labour markets looking set to improve further, and one-time downward pressure on inflation likely to dissipate, a ‘modest’ rate rise would be unlikely to put a halt to jobs growth, Yellen said. At the same time, she said, raising rates too fast could undercut an economy that has for years been labouring against lingering headwinds from the severe recession.


Yellen, returning to the regional Fed bank she used to run, is under pressure to begin tightening monetary policy without disrupting the US economic recovery underway.

The US Fed signalled in its March statement that it was moving a step closer toward raising rates, though the central bank cut its economic outlook and slashed its median estimate for the federal funds rate, in a sign that it was prepared to move more slowly than the market expected ahead of the meeting.

While June remains on the table for the timing of the US central bank’s first rate hike, Yellen’s comments since then suggest it is more likely to move later in 2015.

With the unemployment rate dropping to 5.5 per cent in February, and after more than six years of loose monetary policy, the Federal Reserve is eager to begin raising rates and returning to more normal policy.

Several US Fed officials have said the central bank has waited too long to bump rates higher, and the delay risks stoking inflation and asset bubbles.

But inflation has remained stubbornly low, complicating the Fed’s plan to part ways with its accommodative monetary policy.

Yellen said that if economic conditions evolved how the US Fed’s policy setting committee anticipated, “I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis and the balance of risks I have enumerated of moving either too slowly or too quickly.”


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