Federal Reserve Chairman Janet Yellen painted an optimistic picture of the health of the U.S. economy on Monday, but she noted worries about slowing job creation, suggesting that interest rates would not rise until the labor market shows more signs of life.
Speaking at the World Affairs Council of Philadelphia, Yellen emphasized the progress the economy continues to make in recovering from the Great Recession. But she called last Friday's jobs report, which showed the economy added just 38,000 jobs in May, "disappointing" and "concerning," and she stressed that a high amount of uncertainty continues to cloud forecasts of how fast the economy might grow in the months and years to come.
Yellen said that the current level of interest rates - just above zero - is "generally appropriate," but that she expects the Fed to raise rates in the future "provided that labor market conditions strengthen further and inflation continues to make progress toward our 2 percent objective."
She also said the weak jobs report had tossed a new batch of questions onto the recovery, to go along with uncertainties over global growth, a slowdown of productivity growth in America and the possibility that Great Britain could vote later this month to exit the European Union.
"New questions about the economic outlook have been raised by the recent labor market data," she said, in remarks prepared for delivery. "Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward."
Mostly, though, Yellen stressed her optimism in the path of the recovery, citing employment gains, wage growth and the relatively low number of Americans filing new claims for unemployment insurance. "The overall labor market situation," she said, "has been quite positive."
The Fed has long emphasized that its decisions about when to raise interest rates will depend on the evolution of the economy. If it improves faster than expected, the central bank could raise rates more quickly. But if it stumbles, the Fed could slow down.
So far, the recovery has proved underwhelming. The pace of job creation in May was the economy's weakest in six years. And though the labor market has made great strides since the depths of the financial crisis, the Fed will likely need to see more evidence that progress will continue before it pulls back its support for the recovery.
That means the gradual pace of rate increases that the central bank had outlined over the next few years could turn downright glacial. Yellen’s speech was the last public comment by a Fed official before the central bank meets next week to debate whether to raise rates. Investors lowered their bets of a hike to just 4 percent after the disappointing jobs report, and a move at the Fed’s meeting in July also appears unlikely. Odds of a rate increase do not top 50 percent until December.
Analysts largely read the speech Monday as confirmation of those odds.
"Yellen's speech is clearly aimed at calming nerves," Ian Shepherdson, the chief economist for Pantheon Macroeconomics, wrote in a research brief that argued a September hike remains more likely than one in July, "acknowledging the weakness of the May payroll report but building a strong case for believing it will prove temporary."
Wall Street has long been skeptical of the Fed’s ability to continue raising rates this year, though several officials had warned that investors were too pessimistic. In remarks less than two weeks ago, Yellen said that a rate hike would be appropriate “probably in the coming months,” which many analysts believed meant this summer.
But in recent days, several influential Fed officials have expressed concern about hiking too soon. Chicago Fed President Charles Evans proposed waiting until inflation hits the central bank’s target of 2 percent. Fed Gov. Daniel Tarullo told Bloomberg TV he needed an “affirmative reason” to move. Fed Gov. Lael Brainard, citing mixed economic data and the looming vote in Britain over whether to remain in the European Union, said the “risks of waiting … seem lower than the risks associated with moving ahead of these developments.”
The central bank’s influential interest rate helps steer the path of the U.S. economy. The Fed raises rates when it wants to rein in an overheating economy and combat inflation. Lowering rates helps encourage consumers and businesses to spend and stimulates economic growth.
The Fed slashed its benchmark rate to zero in the depths of the 2008 financial crisis, part of an unprecedented and aggressive effort to rescue the economy and avert another Great Depression. It finally raised rates by a quarter percentage point in December but has yet to do so again.