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Janet Yellen Speech Suggests Fed Will Rethink Interest-Rate Plans Janet Yellen Speech Suggests Fed Will Rethink Interest-Rate Plans
(about 2 hours later)
PHILADELPHIA — The Federal Reserve chairwoman, Janet L. Yellen, dropped previous assurances that she expected the central bank to raise its benchmark interest rate “in the coming months” in a speech here on Monday. The omission in her prepared remarks suggests that the weakness of reported job growth in May is causing the Fed to rethink its plans. PHILADELPHIA — The Federal Reserve has abandoned hope of raising interest rates at its next meeting in June, but Fed officials say they are still thinking seriously about raising rates in July or September.
The most important part of Monday’s speech, in other words, may be the phrase that she dropped, not the words that she said. Janet L. Yellen, the Fed’s chairwoman, who said a few weeks ago that she expected the Fed to raise its benchmark interest rate “in the coming months,” omitted those words from a Monday speech, indicating the reported weakness of job growth in May has caused the Fed to rethink its plans.
Investors have all but written off the chances the Fed will raise rates at its next meeting, which is June 14 and 15, and Ms. Yellen did not try to change their minds. Her speech is the last scheduled public appearance by a Fed official before the meeting. But Ms. Yellen delivered a generally upbeat assessment of economic conditions. While describing the May jobs report as “concerning,” she also emphasized that it was just one piece of data and that other economic indicators, including wage growth, paint a considerably brighter picture.
Ms. Yellen was careful to insist, however, that one bad jobs report had not caused the Fed to scrap its plans entirely, leaving open the prospect that the central bank still could decide to raise rates at meetings in July or September. “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” she told the World Affairs Council of Philadelphia.
She said that she remained optimistic that the economy would continue to grow. Investors have all but written off the chances the Fed will increase rates at its next meeting June 14 and 15, and Ms. Yellen did not try to change their minds. Her speech was the last public appearance by a Fed official before the meeting.
“If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she said in an advance copy of her remarks to the World Affairs Council of Philadelphia. But she added that she still expected growth, and she still expected rate increases.
Ms. Yellen in her speech offered both optimism about the economic outlook and an acknowledgment that there were plenty of reasons growth could once again fall short of the Fed’s expectations, as it has repeatedly since the financial crisis. “If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she said.
She described the May jobs report as “disappointing.” The government estimated last week that the economy added 38,000 jobs in May, well below both market expectations and the pace of hiring so far this year. Other Fed officials have delivered a similar message in the wake of the May report.
Yet she added that she was heartened by the persistence of wage growth and by other evidence that the labor market was in relatively good health. “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” she said. Loretta Mester, president of the Federal Reserve Bank of Cleveland, has sounded relatively confident in recent months that the economy was ready for a rate increase. She said Saturday in Stockholm that the May jobs report, while disappointing, had not changed her overall economic assessment.
James Bullard, president of the Federal Reserve Bank of St. Louis and, like Ms. Mester, one of the 10 officials with votes on monetary policy this year, told The Wall Street Journal that he would like to seriously consider raising rates in July.
Other officials have indicated that they see no reason to rush.
Lael Brainard, a Fed governor who has urged caution in raising rates, described the jobs report as “sobering” on Friday in a speech in Washington.
Daniel Tarullo, a Fed governor who shares Ms. Brainard’s caution, said Thursday in an interview with Bloomberg that he still was looking for “an affirmative reason to move.”
The government estimated last week that the economy added 38,000 jobs in May, well below both market expectations and the pace of hiring so far this year.
The Fed entered the year predicting quarterly rate increases, only to back away from a first increase in March when the economy showed unexpected signs of weakness. Fed officials in recent weeks had insisted that they were thinking seriously about raising rates in June, but now they have abandoned those plans as well.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told Bloomberg on Monday that he did not “see a lot of cost to being patient to the July meeting at least.” He added that he still thought the Fed could raise rates twice this year.
Ms. Yellen in her speech offered optimism about the economic outlook but outlined plenty of reasons that growth could once again disappoint the Fed’s expectations, as it has repeatedly since the financial crisis.
On the optimistic side, she noted that the economy should benefit from a virtuous loop of increased employment and rising incomes. “If the May labor report was an aberration or reflects a temporary slowdown resulting from the weakness in economic activity at the start of the year, then job growth should pick up and support further gains in income,” Ms. Yellen said.
On the other hand, she noted “the less favorable possibility” that a slowdown in corporate investment had now translated into a slowdown in job growth.
“My colleagues and I will be wrestling with these and other related questions going forward,” she said.