The U.S. Federal Reserve is poised to continue its gradual increase of interest rates which aims to sustain the economy’s full employment and near 2-percent inflation. The idea is to make sure the economy does not overheat.
Janet Yellen, Fed Chairman, said, “I think we have a healthy economy now. Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel—to give it some gas but not so much that we are pressing down hard on the acceleration—that’s a better stance of monetary policy. We want to be ahead of the curve and not behind it.”
Last month, the Fed increased rates for the third time and was expected to raise the rates at least two more times this year. Yellen also noted that unemployment is at 4.5% which is a bit below a marker of full employment. Yellen said, “Our assessment of what a neutral stance of short-term interest rates is actually pretty low. Although interest rates right now are low, just a little bit under 1 percent, our estimate of neutral is really not that high.”
Yellen said, “We think a gradual path of increases in short-term interest rates can get us to where we need to be, but we don’t want to wait too long to have that happen. Looking forward, I think the economy is going to continue to grow at a moderate pace. Our job is going to be to try to set monetary policy to sustain what we have achieved.”
Yellen noted that consumer spending was growing at a decent pace and that the global economy was becoming “slightly more robust and healthier.” However, she said that economic growth was still relatively slow and this was outside the powers of monetary policy.
Yellen said, “The fact that you can create that many jobs in the context of growth that is so low points to a significant problem. Moreover, the problem is that productivity growth is very low.”
Some economists suggest that there is a leveling-off in educational attainment to explain the lackluster productivity growth. Research suggested that there is a decline in corporation competition which means less new businesses and more integration instead.
The next Fed meeting is going to be May 2-3, but most economists think the rate hike will not happen then. They predict it will be either at the June or September meeting. In last month’s Fed meeting, there were discussions already on reducing the Fed’s $4.5 trillion balance sheet by the end of 2017.
Yellen expressed her concerns regarding proposals to curtail the Fed’s independence. The proposals would give the Government Accountability Office to review the decisions of Fed on interest rate policies. There is also a proposal that will require the Fed to simply follow a specific formula in setting interest rates.
Yellen said, “Our independence is under some threat. The independence of a central bank to make decisions about monetary policy free of political pressures is very important.”