Federal Reserve Chairwoman Janet Yellen signaled Friday that the central bank is unlikely to raise interest rates ahead of schedule but acknowledged that the accelerating economic recovery has complicated the bank’s policy.
{mosads}”A key challenge is to assess just how far the economy now stands from the attainment of its maximum employment goal,” she said during the Fed’s annual conference in Jackson Hole, Wyo.
“Judgments concerning the size of that gap are complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market’s functioning.”
Still, Yellen said that interest rate hikes could come sooner than expected and “could be more rapid thereafter” if the labor market heats up or inflation ticks up more quickly than expected.
During her remarks, Yellen noted that in the past year, the unemployment rate has “fallen considerably, and at a surprisingly rapid pace.”
But she countered with the argument that the economy’s healing could slow and require continued support from the Fed.
“If economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate,” she said.
“Monetary policy is not on a preset path.”
The plan at this point is for the Fed to begin raising rates in mid-2015 and proceed from there.
“Estimates of slack necessitate difficult judgments about the magnitudes of the cyclical and structural influences affecting labor market variables, including labor force participation, the extent of part-time employment for economic reasons and labor market flows, such as the pace of hires and quits,” she said.
Economists have argued that those factors, along with slow wage growth, are holding back the labor market and the broader economic recovery.
At its last meeting, the Federal Open Market Committee (FOMC) acknowledged that “labor market conditions improved” but determined that “underutilization of labor resources still remains significant.”
She said that the FOMC will continue monitoring the labor market and inflation levels to determine how long to hold interest rates near zero.
“These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover,” she said.