The Federal Reserve cannot provide certainty about its plans for interest rates, Chairwoman Janet Yellen said Wednesday, because it responds to changes in the economy that are themselves uncertain.
Yellen spoke Wednesday after a monetary policy announcement in which the Fed dropped the promise that it would remain “patient” in waiting to raise short-term interest rates.
Instead, the Fed said that wouldn’t raise rates at its next monetary policy meeting in April, but that it would make the decision afterward “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective.”
Yellen clarified in her press conference that a rate hike could come at the scheduled June meeting, but said there was no one measure of inflation that would allow the Fed to be “reasonably confident” that its goal was in reach.
The Fed “can’t provide certainty, and shouldn’t provide certainty, because economic developments that will unfold are uncertain,” Yellen said.
Recent negative inflation in the U.S., Yellen said, is a byproduct of falling oil prices and a rising dollar and likely to prove “transitory” as the economy improves.
But she declined to say which data would convince her that inflation was increasing.
“There is not a single thing where I would say, ‘we must see such and such,'” to know inflation is headed toward the Fed’s 2 percent goal, Yellen said.
Instead, she explained, she and other Fed officials would monitor inflation data “carefully.”
The projections released by Fed officials Wednesday show inflation remaining below 1 percent at the end of the year.
Core inflation, which strips out energy and food prices, would be higher, but still only 1.4 percent. Fed members see inflation hitting the 2 percent target by 2017.
One development she would be watching in particular, she said, would be wage growth. In the past, Yellen has said that wage growth above the recent trend of 2 percent annual gains could reflect the labor market tightening.
But even then, the Fed could decide to raise rates without seeing stronger wage growth, Yellen added.
“We may not see wage growth pick up,” she said. “I wouldn’t say that, either, was a precondition of raising rates.”
Nevertheless, Wednesday’s announcement and press conference were taken as “dovish” signs from the Fed. The Dow Jones Industrial Average and S&P 500 rose sharply after the 2 p.m. announcement and closed up over 1 percent.
The projections released by Fed officials indicate that they believe the unemployment rate, at 5.5 percent in February, could fall further than they previously thought before stoking out-of-control inflation.
They now believe that the long-term rate of unemployment consistent with a healthy economy is between 5 and 5.2 percent.
