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Why Isn’t the Fed Raising Rates? It’s Complicated, Chief Says Why Isn’t the Fed Raising Rates? It’s Complicated, Chief Says
(about 4 hours later)
BOSTON — Janet L. Yellen, the Federal Reserve chairwoman, did not talk on Friday about the Fed’s plans for its benchmark interest rate. Instead, she talked about why those plans have been so hard to make.BOSTON — Janet L. Yellen, the Federal Reserve chairwoman, did not talk on Friday about the Fed’s plans for its benchmark interest rate. Instead, she talked about why those plans have been so hard to make.
In a wide-ranging speech, Ms. Yellen said the Fed was struggling to understand the behavior of the labor market and the weakness of inflation. It is reconsidering how changes in monetary policy ripple through the economy, and the role of international events. In short, as often happens after a crisis, the Fed is sorting through some existential issues. In a wide-ranging speech, Ms. Yellen said the Fed was struggling to understand the behavior of the labor market and the weakness of inflation. It is reconsidering how changes in monetary policy ripple through the economy, and the impact of international events. In short, as often happens after a crisis, the Fed is sorting through some existential issues.
“The events of the past few years have revealed limits in economists’ understanding of the economy and suggest several important questions I hope the profession will try to answer,” she said at a conference here hosted by the Federal Reserve Bank of Boston. “Some of these questions are not new, though recent events have made them more urgent.” “The events of the past few years have revealed limits in economists’ understanding of the economy and suggest several important questions I hope the profession will try to answer,” she said at a conference here hosted by the Federal Reserve Bank of Boston.
The Fed has indicated it is likely to raise rates at its final meeting of the year in December if economic growth continues, although it has repeatedly retreated from similar predictions in the last nine months. Eric S. Rosengren, president of the Federal Reserve Bank of Boston, reiterated that prediction Friday, and, according to CME Group, investors now see a 70 percent chance the Fed will raise its benchmark rate in two months. The Fed has indicated it is likely to raise rates in December if economic growth continues, although it has repeatedly retreated from similar predictions in the last nine months. Investors now see more than a 70 percent chance of a December hike, according to CME Group, and Eric S. Rosengren, the Boston Fed’s president, buttressed those expectations Friday.
“The market seems to think that there’s a very high probability of December,” Mr. Rosengren told CNBC. “We’ll see how the economic data actually comes in, but I think that is priced appropriately.”“The market seems to think that there’s a very high probability of December,” Mr. Rosengren told CNBC. “We’ll see how the economic data actually comes in, but I think that is priced appropriately.”
Mr. Rosengren, however, also was ready to raise rates in September. Ms. Yellen was not. Mr. Rosengren, however, was ready to raise rates in September.
The debate among Fed officials revolves in part around the consequences of temporarily pushing unemployment to an unsustainably low level. Holding down interest rates encourages job growth. A certain amount of unemployment lubricates labor markets, providing a ready supply of workers for businesses that are expanding. In the past, pushing unemployment below that level has increased inflation. Mr. Rosengren has warned the Fed could be forced, as a consequence, to raise rates more quickly than it otherwise would have , and that, in turn, could cause a recession. Ms. Yellen and most of her colleagues were not.
But an unusually large share of American adults are not seeking jobs. They are neither working nor counted among the unemployed. Ms. Yellen and other Fed officials have raised the possibility that a low unemployment rate could persuade some of these people to start looking. That could increase economic growth without increasing inflation. The debate among Fed officials revolves in part around the consequences of holding down interest rates to push unemployment to an unsustainably low level. A certain amount of unemployment lubricates labor markets, maintaining a ready supply of workers for businesses that are expanding. In the past, pushing unemployment below that level has increased inflation. Mr. Rosengren has warned that could force the Fed to raise rates more sharply, potentially driving the economy into recession.
“If strong economic conditions can partially reverse supply-side damage after it has occurred, then policy makers may want to aim at being more accommodative during recoveries than would be called for under the traditional view,” Ms. Yellen said in her speech Friday. She added, however, that the issue required further research. But an unusually large share of American adults are neither working nor counted among the unemployed. They are not trying to find jobs. Ms. Yellen and other Fed officials have raised the possibility that a low unemployment rate could persuade some of these people to start looking. That could increase growth without increasing inflation.
Ms. Yellen surveyed a number of other issues perplexing the Fed. “If strong economic conditions can partially reverse supply-side damage after it has occurred, then policy makers may want to aim at being more accommodative during recoveries than would be called for under the traditional view,” Ms. Yellen said on Friday.
Low interest rates have provided less of an economic lift than standard economic models predicted. One possible reason is that households and businesses struggling to repay debts were unwilling, or unable, to take advantage of low interest rates. Ms. Yellen described this outcome as “plausible” but not proven. Businesses buoyed by strong sales might expand; workers might find it easier to move into better jobs; increased investment in research might even lead to higher productivity growth.
Inflation also has been much weaker than Fed officials expected. The Fed is embarked on the experiment. Officials predicted in December that they would raise rates four times this year. So far, they have not raised rates at all. The Fed’s benchmark rate remains in a range between 0.25 percent and 0.5 percent, a low level that encourages investment and risk-taking.
And there are questions about the relationship between the domestic economy and the rest of the world. Some officials argue that the United States should pay more attention to the health of the global economy. Others see the domestic economy as largely self-contained. And over the last year, the unemployment rate has held steady while the labor force has expanded.
“This is a wonderful time to be an academic,” Mr. Rosengren said in introducing Ms. Yellen. But, he continued, “I empathize with the challenges our chair has” in charting policy in an environment of so many uncertainties. The question is how much further the Fed can go.
Even some officials who opposed the September increase are sounding ready to move in December. The presenters at the Boston Fed conference, which was devoted to the slow pace of growth in recent years, generally attributed a large share of the economy’s underperformance to issues that would seem beyond the reach of monetary policy, including demographic shifts and slow productivity growth.
Charles Evans, president of the Federal Reserve Bank of Chicago, said early this month that he wanted the Fed to move forward slowly, but he did not regard the exact timing of the next rate increase as important. December would be “fine,” he said. “Just pushing down unemployment, by itself, is unlikely to draw large numbers of workers back into the labor force,” said Gabriel Chodorow-Reich, a professor of economics at Harvard University.
“I am less concerned about the timing of the next increase than I am about the path over the next three years,” Mr. Evans told reporters in Auckland, New Zealand. James Stock, also a Harvard economist, said annual growth during this expansion has been about 1.74 percentage points slower than the last three expansions. He said demographics and productivity accounted for about 0.9 percentage points of the shortfall. He attributed most of the rest to insufficient government spending and weak demand for exports.
The Fed officials most vocally opposed to higher rates, however, have not suggested that they are ready to move in December. Yet few drew the conclusion that the Fed should raise rates.
The Fed is unlikely to act at its next meeting, in November, just a few days before the presidential election on Nov. 8. Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said on Thursday that it made sense to postpone any action because the election could have significant economic consequences. Peter Ireland, a professor of economics at Boston College, described himself as “really, really nervous” about the judgment that the central bank’s work is done.
“It may be prudent to wait until we have resolved some of that uncertainty,” he said. “My December vote is no,” said Robert E. Hall, a Stanford economist.
The Fed is unlikely to act at its next meeting, in November, just a few days before the presidential election on Nov. 8. Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said on Thursday that the election could cause significant economic disruptions.
“It may be prudent to wait until we have resolved some of that uncertainty,” Mr. Harker said.
The Fed’s last meeting of the year, in December, looks more likely for a rate change. Charles Evans, president of the Federal Reserve Bank of Chicago, said early this month that he wanted the Fed to move forward slowly, but that he did not regard the exact timing of the next rate increase as important.
December would be “fine,” Mr. Evans told reporters in Auckland, New Zealand. “I am less concerned about the timing of the next increase than I am about the path over the next three years.”
Ms. Yellen surveyed a number of the issues that are perplexing Fed policy makers.
The conventional understanding of monetary policy is that the Fed raises or lowers interest rates, which moves markets, which changes the behavior of businesses and consumers, and so the American economy grows or slows. But the Fed has struggled to stimulate the economy.
One possible reason, Ms. Yellen said, is that households and businesses with relatively large debts were unwilling, or unable, to take advantage of low interest rates. She said that the Fed also needed to improve its understanding of the economic impact of changes in financial conditions.
The behavior of inflation is another mystery. It fell less than expected during the recession; it has strengthened more slowly than expected in the aftermath. “The influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought,” she said.
Finally, she mentioned the impact of global economic weakness on domestic growth.
“This is a wonderful time to be an academic,” Mr. Rosengren said in introducing Ms. Yellen. But, he continued, “I empathize with the challenges our chair has” in charting policy with so many uncertainties.