Friday, August 22, 2014

Yellen: Increase in the Federal Funds Rate Could Come Sooner

In a speech today, Federal Reserve Chairwoman Janet Yellen said that the federal funds rate rise could occur sooner than the Federal Reserve had originally planned. She stated that, “If progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated . . . then than the Committee currently expects and could be more rapid thereafter.” However, she also noted that rates could raise later than anticipated if the data disappoints.

The nuanced speech walked a fine line between airing a more dovish or hawkish stance on monetary policy. She concluded that, “I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market.”

The comments mark a notable shift from Yellen’s position earlier this year that highlighted the underemployment that still exists in the U.S. economy. “With the economy getting closer to our objectives, the [Federal Open Market Committee’s] emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation,” she said.

Yellen’s speech appeared to shift her focus from propping up a recovering economy with an underutilized labor force to when interest rates will rise.

Read the full speech.

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