Janet Yellen Clarifies Interest Rate Hike Timing in Speech

The notion that Janet Yellen and the voting Federal Reserve presidents decided to keep interest rate hikes on hold has brought on much controversy. Now we at least have some additional hints on when interest rates may be hiked — LATER THIS YEAR.

Janet Yellen was speaking at the University of Massachusetts, Amherst on Thursday. Her speech was titled “Inflation Dynamics and Monetary Policy.”

Yellen was not set to take questions and answers. The speech was to discuss inflation and its role in the Federal Reserve’s conduct of monetary policy. Yellen’s take is that inflation is now much more stable than it used to be, and that inflation is currently running at a very low level. Yellen also brought up “the costs” associated with inflation and why the Federal Reserve should try to keep inflation close to 2%.

The most important part of this very long speech was in the conclusion. We have highlighted the more important part on the timing as well, as follows:

Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

Yellen’s full speech was far too long to copy and paste verbatim. Her full speech can be accessed here.

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