Yellen still in no hurry to raise rates, looks to further data

DURING HER SPEECH at the Economic Outlook Luncheon put on by the Greater Providence Chamber of Commerce, Federal Reserve Chair Janel L. Yellen reiterated concerns about the continuing slack in labor markets, including in Rhode Island. / BLOOMBERG NEWS/SCOTT EISEN
DURING HER SPEECH at the Economic Outlook Luncheon put on by the Greater Providence Chamber of Commerce, Federal Reserve Chair Janel L. Yellen reiterated concerns about the continuing slack in labor markets, including in Rhode Island. / BLOOMBERG NEWS/SCOTT EISEN

PROVIDENCE – During a visit to the Ocean State on Friday, Federal Reserve Chair Janet L. Yellen told hundreds of Rhode Islanders that there are still a number of “economic headwinds” that are slowing the U.S. economy.

But if the economy continues to improve, as she expects, she says it would be appropriate to “take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy,” at some point this year.

Yellen addressed nearly 500 members of the business community, Rhode Island elected officials and economists at the Great Providence Chamber of Commerce Economic Outlook Luncheon. Before speaking broadly about different indicators within the U.S. economy, its labor market and the sluggish first quarter of 2015, she talked about Rhode Island and its economic recovery since the financial crisis of 2008.

“Rhode Islanders are well aware of the great toll taken by the recession,” Yellen said. “The unemployment rate hit 10 percent nationally and it reached 11.3 percent here in Rhode Island.”

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She noted the 41,000 jobs lost in Rhode Island, representing about 8 percent of the state’s employment, adding that the hardest-hit industries nationwide were housing construction and manufacturing, which “are important to the Rhode Island economy.”

Rhode Island is sharing in the nation’s economic recovery, she added, but Yellen did not sugarcoat its current economic condition.

“I am well aware that economic conditions remain difficult here,” Yellen said. “Rhode Island’s unemployment rate improved very slowly during the recovery, and, for the first time, it was the highest of any state. The jobless rate has come down a lot over the past year or so, but at 6.3 percent in March, unemployment here remains above the national average and payroll employment has yet to regain its pre-recession peak.”

The state Department of Labor and Training said the jobless rate in Rhode Island in April was 6.1 percent.

Gov. Gina M. Raimondo, who spoke before Yellen, acknowledged some of these current economic indicators that continue to drag on Rhode Island’s recovery, but spoke with more optimism about its future.

“I’m optimistic,” Raimondo said pointedly, adding that there are a number of different steps that need to be taken in order for us to reach an economic “comeback.”

Raimondo says she wants every member of the business community to be economic development ambassadors for Rhode Island and to help nudge other businesses considering a move to consider the Ocean State.

Speaking more broadly about the U.S. economy, Yellen says the labor market is “approaching its full strength,” but isn’t there yet.

“The unemployment rate has come down close to levels that many economists believe is sustainable in the long run without generating inflation,” Yellen said. “But the unemployment rate today probably does not fully capture the extent of slack in the labor market.”

She went on to explain that there are still a number of people who are still outside of the labor force – not actively seeking work – “because they still perceive a lack of good job opportunities.”

Yellen reiterated the message that consumer price inflation level is still less than the Fed’s stated objective of 2 percent, but she believes it will move up as the “economy strengthens further and as other temporary factors weighing on inflation recede.”

Yellen is referring – in part – to the unusually cold and snowy winter on the East Coast and labor disputes on the West Coast, which likely “disrupted some economic activity.”

These – among several other economic indicators that have weighed on the U.S. economy through the first quarter of this year – have given Fed officials pause in considering exactly when to raise benchmark interest rates.

“Because of the substantial lags in the effects of monetary policy in the economy, we must take policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy,” Yellen said.

Mixed U.S. economic reports have investors pushing back on estimates for when the Fed will begin raising benchmark interest rates, which have hovered near zero since easy-money policies were implemented following the economic crisis in 2008.

“After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual,” Yellen said. “The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate and the pace of that improvement is highly uncertain.”

“We have no intention of embarking on a preset course of increases in the federal funds rate after the initial increase,” she continued. “If conditions improve more rapidly than expected, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable.”

Yellen, born in Brooklyn, N.Y., graduated in 1967 with an economics degree from Pembroke College, which was the women’s college of Brown University before it merged into Brown in 1971, which was the same year she received her PhD in economics from Yale University.

She closed her speech saying that the Federal Reserve does not – by itself – ensure a strong pace of economic growth, but that the most important factor determining living standards is “productivity growth,” which has been relatively weak while investment during the recovery has been modest.

“In particular, investment in research and development has been relatively weak. Moreover, a lack of financing may have impaired the ability of people to start new businesses and implement new ideas and technologies,” Yellen said. “To the extent this is so, Federal Reserve actions to strengthen the recovery may not only help bring our economy back to its productive potential, but it may also support the growth of productivity and living standards over the longer run.”

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