Federal Reserve Chair Janet Yellen said on Wednesday the US economy appeared to be slowly moving toward full employment, but that it would need help from the central bank for some time to come.
In her second public speech since taking the Fed's helm, Yellen said it was "quite plausible" the economy would be back to near full employment and a healthier level of inflation by the end of 2016.
"I do think we are seeing very meaningful progress, although clearly ... the goal has not been achieved at this point," she told the Economic Club of New York.
Yellen used her speech to provide a monetary policy road map of sorts to one of the Fed's most important constituencies - Wall Street.
How long rates will stay near zero, she said, will depend on how far the US economy remains from the central bank's employment and inflation goals, and how long it will likely take to meet them. She stressed that the Fed would respond to shifting economic conditions as it judges when to finally tighten monetary policy after years of unprecedented stimulus.
And although she emphasised how important it will be for the Fed to keep monetary policy easy for some time, she pointed to an eventual end to those policies.
"As the recovery proceeds and healing occurs, it's obvious that we will need to tighten monetary policy to avoid overshooting our target," she said. "We will remain very focused on removing accommodation when the right time has come."
But she also emphasized that unforeseeable events could alter the central bank's current course, as it has several times over the course of the recovery.
The Fed could even set aside efforts to wind down its bond-buying stimulus, she said, pushing back against broad expectations that the Fed is nearly certain to end the bond-buying, now at $55 billion a month, by the end of the year.
The Fed, frustrated with the slow US recovery from the 2007-2009 recession, aims for maximum sustainable employment and a rise in inflation to 2 per cent from just above 1 per cent now.
"The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained," Yellen said.
This approach, she said, underscores the Fed's commitment to "maintain the appropriate degree of accommodation to support the recovery." The decision to tighten will not be based on any one economic indicator but on "a wide range of information on the labor market, inflation, and financial developments."
The central bank has kept its key rate near zero since the depths of the financial crisis in late 2008.
Since then the Fed has tried an array of strategies to telegraph just how long it will wait to tighten policy, including tying the ultra-low rates to time periods, and later, to specific unemployment and inflation thresholds.
Last month the Fed rolled out its latest version of forward guidance, effectively promising not to raise rates for a "considerable time" after it halts its bond-buying program. But Yellen sowed more confusion when she then told a press conference that a "considerable time" means about "six months" or so.
Yellen did not mention the six-month recess in her remarks on Wednesday.
The Fed chair repeated there is likely more so-called slack in the labor market than is suggested by the unemployment rate, which was 6.7 per cent last month. That means that joblessness should fall further before wages start to push up inflation.
She also said inflation should rise as the slack diminishes, another theme she addressed in a speech last month in Chicago.
Reuters
