Thursday, July 31, 2014
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Yellen: US economy still needs help from Fed

By
From page B6 | June 19, 2014 |

WASHINGTON — The U.S. economy still isn’t healthy enough to grow at a consistently strong pace without the Federal Reserve’s help.

That was the message Fed Chair Janet Yellen sent Wednesday at a news conference after the central bank ended a two-day policy meeting.

Yellen made clear that despite a steadily improving job market and signs of creeping inflation, the Fed sees no need to raise short-term interest rates from record lows anytime soon.

Her remarks followed a statement from the Fed that it would further slow the pace of its long-term bond purchases. The bond purchases have been intended to keep long-term loan rates low. But the Fed offered no clear signal about when it will start raising its benchmark short-term rate.

Most economists think a rate increase is at least a year away despite signs of rising inflation. And at her news conference, Yellen downplayed inflation concerns.

Recent inflation figures are “noisy,” Yellen said.

Her comment suggested that the Fed doesn’t see inflation as a threat that it would soon need to combat through higher interest rates.

David Jones, chief economist at DMJ Advisors, said the Fed and Yellen made plain that the central bank still intends to keep rates low for a considerable time.

“The Fed is saying the economy still needs help and that inflation is not a threat at the moment,” Jones said. “Yellen is a lot more worried at the moment about how the job market is behaving than how inflation is behaving.”

The Fed’s statement was nearly identical to the one it issued after its last meeting in April. It reiterated its plan to keep short-term rates low “for a considerable time” after it ends its bond purchases.

It also downgraded its forecast for growth for 2014, acknowledging that a harsh winter caused the economy to shrink in the January-March quarter. In addition, the Fed barely raised its forecast for inflation.

The Fed expects growth to be just 2.1 percent to 2.3 percent this year, down from 2.8 percent to 3 percent in its last projections in March. It thinks inflation will be a slight 1.5 percent to 1.7 percent by year’s end, near its earlier estimate.

It foresees the unemployment rate, now at 6.3 percent, dipping to between 6 percent and 6.1 percent by the end of this year. That’s a slight improvement from the Fed’s forecast in March, when it predicted that unemployment would be as high as 6.3 percent at year’s end.

Stock investors appeared pleased with the Fed’s message that rates would remain low. Major stock indexes surged more than half a percentage point, with the Standard & Poor’s 500 index reaching a record. And the yield on the 10-year Treasury note dipped to 2.59 percent from 2.65 percent late Tuesday.

“The last thing that Janet Yellen wants is for the market to think she’s anywhere close to tightening,” said David Robin, managing director at the brokerage Newedge. “She nailed it.”

The Fed’s decision to further pare its bond buying means its monthly purchases of long-term bonds will be reduced from $45 billion to $35 billion starting in July. It marked the fifth cut in the purchases since December as the Fed slows the support it’s providing the economy.

The bond buying is expected to end altogether by fall.

The Fed’s statement was approved on an 11-0 vote, with support from the Fed’s three newest members: Vice Chairman Stanley Fischer, board member Lael Brainard and Loretta Mester, the new president of the Fed’s regional bank in Cleveland.

The slight changes in the Fed’s statement pointed to signs of a strengthening economy now that a brutal winter has passed. The statement said economic activity had “rebounded,” with gains in the job market, household spending and business investment.

The statement signaled no concern about the recent acceleration in inflation. It repeated language on inflation in which the Fed said it was still concerned that inflation remained below its 2 percent target.

 

The Associated Press

The Associated Press

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