Federal Reserve Chair Janet Yellen delivers her economic outlook at the Greater Rhode Island Chamber of Commerce on May 22. 2015. Photographer: Scott Eisen/Bloomberg

 

Federal Reserve Chair Janet Yellen on Friday reaffirmed the central bank’s plans to raise interest rates this year despite new concerns that the nation’s economic recovery may be slowing down.

In a speech in Rhode Island, Yellen dismissed disappointing data from earlier this year. Government figures showed growth came to a halt during the first quarter, and many private economists believe the revised numbers will show the economy actually contracted. Data for the second quarter suggests any rebound will be modest.

But Yellen expressed confidence that the recovery remains intact -- even if it is not as robust as Fed officials themselves once thought. And that would be enough for the Fed to begin reversing nearly a decade of easy money.

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

Yellen explicitly stated Friday that she expects the Fed will raise its benchmark interest rate this year, assuming the recovery proceeds as forecast. Most investors believe that means the central bank will make its first move in December, according to prices of fed funds futures.

Still, Yellen emphasized that the economy has yet to fully heal from the deep wounds of the Great Recession. She noted that many people have dropped out of the work force because they were discouraged by their job prospects, while others are working part-time when they would prefer full-time jobs. Wage growth has remained anemic, and inflation has persistently run below the Fed’s 2 percent goal.

But Yellen pointed to other signs of progress: Fewer homeowners are underwater, meaning that they owe more on their house than it is worth. Government spending cuts have abated, and efforts by Walmart and Target to increase workers’ pay could portend broader wage gains.

“The headwinds facing our economy have not fully abated, and, as such, I expect that continued growth in employment and output will be moderate over the remainder of the year and beyond,” she said.

That’s why the pace of future interest rate increases would likely be “gradual.” Yellen said. However, she cautioned that officials have “no intention” of raising rates on a preset course but would tailor their strategy to the progress of the economy. The Fed’s objectives “would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level,” Yellen said.

Officials at the central bank have struggled to interpret the direction of the economy in recent months. By several measures, the recovery seems to be following the Fed’s script. The Labor Department released data Friday showing core inflation, which excludes prices of food and energy, rose 0.3 percent in April -- the strongest rate in nearly four years and a sign that prices may finally be moving toward the Fed’s goal.

Meanwhile, the unemployment rate has dropped substantially over the past year and is nearing what many economists believe is its lowest sustainable level. Hiring is robust, and so-called underemployment is diminishing.

Yet those factors have not translated into solid economic growth. At their last policy meeting in April, Fed officials cited a range of possible explanations: the West Coast port shutdown, bad winter weather and statistical noise. Yellen reiterated those on Friday, but sounded a humble note when it comes to forecasting.

“I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection that I write down will turn out to be wrong, perhaps markedly so,” she said.

Two top Fed officials are pushing the central bank to wait until next year to begin raising rates. Earlier this week, Chicago Fed President Charles Evans argued for “exercising caution” as the central bank retreats from its easy-money stance.

“I see no compelling reason for us to be in a hurry to tighten financial conditions,” he said during a speech in Germany.