Low interest rates necessary'for some time': Fed Chair
April 2, 2014, 12:01 am TWN
WASHINGTON--Federal Reserve Chair Janet Yellen made clear Monday that she thinks the still-subpar U.S. job market will continue to need the help of low interest rates “for some time.”
Yellen's remarks signaled that even after the Fed phases out its monthly bond purchases later this year, it has no plans to raise a key short-term rate anytime soon. The bond purchases have been intended to keep long-term loan rates low.
Her remarks sent a reassuring message to investors, many of whom had grown anxious that the Fed might raise short-term rates by mid-2015. Their concerns were stirred two weeks ago, when Yellen suggested that the Fed could start raising short-term rates six months after it halts its bond purchases, which most economists expect by year's end.
A short-term rate increase would elevate borrowing costs and could hurt stock prices.
But on Monday, Yellen indicated that the Fed still thinks rates should remain low to stimulate borrowing, spending and economic growth.
“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely held by my fellow policymakers at the Fed,” Yellen said in her first major speech since taking over the Fed's leadership in February.
Stocks, which had been up before Yellen began speaking, rose further on her remarks. The Dow Jones industrial average closed up about 134 points. Low rates tend to lead some investors to shift money into stocks and thereby raise stock prices.
Speaking to a national conference on community reinvestment in Chicago, Yellen described the U.S. job market as less than healthy despite steady improvement since the recession ended nearly five years ago. She said the difficulty many people are still having finding full-time work shows that low rates are still needed to encourage borrowing and spending.
Economists said they viewed Yellen's comments as a message that even though the Fed is trimming its bond purchases, it's nowhere near moving to raise its benchmark short-term rate, which has been at a record low near zero since December 2008.
“Chair Yellen pulled out just about every dovish tool in the box as she highlighted that the economy needs extraordinary support for some time,” said Bricklin Dwyer, an economist at BNP Paribas. Dwyer said he thinks the Fed's first rate hike will come in early 2016.
In an unusual touch for a speech by a Fed chief, Yellen described the personal stories of three people who had lost their jobs during the recession and struggled to find work.
“They are a reminder that there are real people behind the statistics,” Yellen said. She noted the struggles of a medical claims processor, a printing plant worker and a construction worker who lost their jobs during the Great Recession.
Yellen said that while the unemployment rate has fallen from a peak of 10 percent in October 2009 to 6.7 percent in February, by many measures the job market remains weak. She said she and her Fed colleagues think an unemployment rate between 5.2 percent and 5.6 percent would be “consistent with maximum sustainable employment.”
As she did at her first news conference two weeks ago, Yellen said she monitors measures beyond the unemployment rate in assessing the job market. These include the percentage of unemployed workers who have been out of work for more than six months and a gauge of people without jobs who have stopped looking for one or who have had to take a part-time job even though they would like full-time work.
Yellen's remarks came at a national conference on community development sponsored by the Fed and other banking regulators and the Treasury Department. Afterward, she toured a manufacturing lab at Daley College to observe a program to train students for high-tech manufacturing jobs.