Janet Yellen Prefers Raising Fed Rates Prudently and Gradually

By David Harrison And Ben Leubsdorf 

        Federal Reserve Chairwoman Janet Yellen on Thursday said the U.S. labor market had moved demonstrably closer to a more normal state, a reason why the central bank is likely to raise short-term interest rates later this year.
        Ms. Yellen, speaking to the Senate Banking Committee a day after appearing before the House Financial Services Committee, again avoided specifying exactly when the Fed is likely to start lifting its benchmark rate from near zero.
        She said moving too soon could threaten the recovery while waiting too long would risk overheating the economy and accelerating inflation. "My own preference would be to be able to proceed to tighten in a prudent and gradual manner," she said.
        The Fed has held its benchmark federal-funds rate near zero since December 2008 to bolster the economy through the financial crisis, recession and uneven recovery. Most of the U.S. central bank's policy makers have said they expect to start raising the rate this year if the economy continues to strengthen as they forecast, and m any private economists consider September the likely time for liftoff.
        Ms. Yellen on Thursday fended off pressure from lawmakers of both parties worried that the Fed would err in its decision of when and how to proceed on rates.
        Sen. Richard Shelby (R., Ala.), the committee's chairman, said he was concerned about the Fed keeping short-term rates low as the jobless rate falls. "This is concerning to a lot of people because pushing the economy beyond its normal level can have negative effects, as we've seen with economic bubbles in recent history," he said.
        On the other hand, Sen. Sherrod Brown (D., Ohio), the panel's ranking Democrat, said "there are real risks in tightening monetary policy too soon because although the economy has made progress since the crisis, we still have a ways to go."
        Ms. Yellen highlighted improvement in the labor market and the broader economy as reasons why the Fed is likely to raise rates in the months ahead. "The labor market is getting demonstrably closer, in my view, by almost any metric to a more normal state," she said.
        While wage growth has been sluggish for years, Ms. Yellen said, one key measure of worker pay, the Labor Department's employment-cost index, has seen a "meaningful pickup" in the past year. "I would expect to see some further upward movement" in wage growth going forward, she said, while cautioning that "where they can go depends in part on productivity growth."
        To address slow productivity growth, Ms. Yellen gave Congress a to-do list, suggesting policies to improve education and entrepreneurship as well as increasing capital investment, both public and private.
        "Those are the kinds of policies that Congress and the public need to consider," she said. "These are deeper structural trends, not just related to the cyclical nature of the economy."
        Responding to a question about the current $50 billion threshold for banks to be considered systemically important and undergo tougher regulatory scrutiny, Ms. Yellen said she was open to a modest increase. But she said the Fed should have discretion to require stress tests and other measures if banks pose a serious risk to the financial system, even if their assets come in below the threshold.
        Ms. Yellen also said a preliminary read of the resolution plans filed by the biggest U.S. banks this month suggest the companies have made progress, particularly improving the disclosures in the public portions of the plans. The Fed and Federal Deposit Insurance Corp. last year found most of the so-called living wills, which detail how the banks would navigate the bankruptcy process, were flawed.
        "If we continue to see shortcomings in the living wills, we'll use our authority to determine if these resolution plans don't meet Dodd-Frank requirements," she said.
        Kate Davidson contributed to this article
        Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
        (END) Dow Jones Newswires

        July 16, 2015 17:43 ET (21:43 GMT)

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