Chair of the U.S. Federal Reserve, Janet Yellen, pledged to gradually and cautiously raise interest rates, providing some reassurance to markets in the U.S. and around the world that are relying on cheap financing.
CCTV America’s Daniel Ryntjes reported this story from Washington, D.C.
Federal Reserve reassures gradual interest rates increasesChair of the U.S. Federal Reserve, Janet Yellen has pledged to gradually and cautiously raise interest rates, providing some reassurance to markets in the U.S. and around the world that are relying on cheap financing.
The U.S. economy has shown signs of sustained improvement after years of uneven recovery from the 2008 financial crisis, and America’s central bank was considering when to begin raising interest rates in 2015.
The Federal Funds rate is the main tool for the Fed to adjust the cost of borrowing dollars, which has been held at near zero for six years, in order to encourage economic activity.
There has been no rise in inflation, mainly because wages haven’t risen much and energy prices have decreased.
“Even as they have this situation with inflation being too low, the real economy is doing very well,” Greg Ip, U.S. economics editor at The Economist, said. “Every single meeting when Janet Yellen and her colleagues sit down around that table in downtown Washington, they’re going to have to make that decision. What do we weigh more, the fact that the economy’s doing well or the fact, that gosh, that inflation rate seems stuck at too low a level?”
Economists generally think sustained low inflation can suppress economic growth. But Yellen predicted inflation will begin to pick up as momentum builds in jobs, wages, and in consumer and business activity.
“Inflation has continued to run below the committee’s two percent objective, and the recent sizable declines in oil prices will likely hold down overall inflation in the near term,” Yellen said. “But as the affects of these oil price declines and transitory factors dissipate, and as resource utilization continues to rise, the committee expects inflation to move gradually back toward its objective.”
She said the Federal Open Market Committee will be “patient” about raising interest rates. The consensus forecast is for the first move to be made later in the year.
“As long as we we continue to see solid labor market data, it’s pretty likely that you’re going to see a Fed increase, [in the] third or fourth quarter of 2015,” professor Joseph Foudy of New York University’s Stern School of Business said. “It would take some pretty significant negative surprises to push that off. Similarly speaking, we’d have to see sudden strong increases in inflation, particularly wage inflation, before you got any talk of moving it earlier.”
The Federal Reserve holds more than $4.5 trillion in treasury bonds and mortgage backed securities purchased during three rounds of buying assets, known as quantitative easing.
The Fed has indicated it won’t suddenly sell these assets in order to maintain downward pressure on borrowing costs.
Overall, the Fed Chair has indicated little desire to raise rates too quickly even after the first rate rise begins. Yellen said she will try to stay away from any sharp or surprise moves in 2015 to avoid upsetting the recovery.
Saruhan Hatipoglu from BERI on the US economy
The U.S. economy is ending 2014 on a high note, and a new year could mean more progress for the world’s biggest economy.
For more, CCTV America talked with Saruhan Hatipoglu. He’s the CEO of Business Environment Risk Intelligence, a consulting firm that advises business clients on global strategies.