Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors,” which she did not specify, holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.
Balance Sheet
She also mentioned that the Fed anticipates it will start reducing its balance sheet “this year.” The size of the balance sheet once this process has been completed is uncertain, she said, partly because the banking system’s demand for reserves is not yet known.
Yellen said low readings on inflation are partly the result of “a few unusual reductions” in certain price categories which will hold 12-month inflation down until they drop out of the calculation. However, she also said there is uncertainty about inflation’s response to tightening resource use.
She noted that the FOMC said in June it will “carefully monitor actual and expected progress” toward its inflation goal.
Inflation has been below the central bank’s 2 percent target for most of the past five years.
With U.S. economy growing at a steady pace, Yellen’s Fed is gradually pulling back from crisis-era stimulus. It raised interest rates in June for a second time this year and forecast another hike in 2017.
The U.S. expansion is in its ninth year and continues to create jobs without much inflation. Unemployment was 4.4 percent in June and employers have added 187,000 jobs a month on average over the past 12 months. But stronger demand for labor hasn’t fed into higher wages.
This article was provided by Bloomberg News.