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Friday, May 22, 2015

Yellen: Rate Hike Likely This Year, Despite Headwinds

“[I]f 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 the process of normalizing monetary policy,” Federal Reserve Chair Janet Yellen said in a speech at the Providence Chamber of Commerce in Rhode Island. But, as always, Yellen included the adage that increases in the federal funds rate will be data dependent and are not on a preset course.

Yellen’s monetary policy projection is based on her overall belief that, while there are headwinds, the economy is growing at a moderate pace. Job growth has gradually strengthened; the unemployment rate has declined to 5.4%, the number of job openings has risen and more workers are quitting their jobs, signaling greater confidence in their ability to find a new job. However, there is still slack in the labor market in the form of those working part time for economic reasons, those who are out of the labor force but would work if conditions were better and those who perceive a lack of good job opportunities, as well as overall disappointing wage growth. But these labor market headwinds are showing sign of abating, and wage gains at larger retailers such as Wal-Mart and Target signal that there might be larger wage gains in the future.

In recent months, some economic data have suggested that the pace of improvement in the economy may have slowed. But Yellen believes that the flat GDP projection in the first quarter was largely due to transitory factors, including the unusually harsh winter and the labor dispute at ports on the West Coast, as well as some statistical noise. Yellen expects the economic data to strengthen, and for employment and output to be moderate over the remainder of the year and beyond.

Price inflation still remains a headwind, as CPI has been held down by the continued economic weakness during the slow recovery and, more recently, by lower prices of imported goods as well as the fall in oil prices. But with oil prices no longer declining, Yellen and other FOMC members believe that CPI will move up to 2% as the economy strengthens.

Read the speech.

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