April 16 - Federal Reserve Chair Janet Yellen says policymakers are prepared to keep interest rates low as long as unemployment remains high and inflation tame, but both of those are expected to gradually return to normal. Conway G. Gittens reports.
In case there was any confusion, Federal Reserve Chair Janet Yellen is saying it again: low inflation + high unemployment = low interest rates. But she warns: that calculation is changing. SOUNDBITE: FEDERAL RESERVE CHAIR JANET YELLEN (ENGLISH) SAYING: "We anticipate that as the effect of transitory factors subside and labor market gains continue, inflation will gradually move back toward two percent. In sum, the central tendency of FOMC participant projections for the unemployment rate at the end of 2016 is 5.2 to 5.6 percent and for inflation, the central tendency is 1.7 to 2 percent. If this forecast was to become a reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade." That's a clear signal of the so-called timing of the "lift off" - that's the phrase given as to when the Federal Reserve will start hiking interest rates. She expects improvements in the labor market to spark a rise in inflation, but she's also worried about prices heading in the other direction, which means the Fed will be careful before starting that rate rise. SOUNDBITE: FEDERAL RESERVE CHAIR JANET YELLEN (ENGLISH) SAYING: "The FOMC strives to avoid inflation slipping two far below its two percent objective because at very low inflation rates adverse economic developments could more easily push the economy into deflation. The limited historical evidence with deflation shows that once it starts, deflation can become entrenched and associated with prolonged periods of very weak economic performance." But Yellen says the risk of deflation is not as great as letting the economy get too hot, which means the Fed is ready to step in to cool the economy instead of leaving rates too low, for too long.