Yellen Foresees Continued Low Borrowing Rates

Charles Dharapak/APFederal Reserve Chair Janet Yellen

WASHINGTON -- WASHINGTON -- Federal Reserve Chair Janet Yellen said Wednesday that the U.S. economy is improving but noted that the job market remains "far from satisfactory" and inflation is still below the Fed's target rate.

Speaking to Congress' Joint Economic Committee, Yellen said that as a result, she expects low borrowing rates will continue to be needed for a "considerable time."

Yellen's comments echo earlier signals that the Fed has no intention of acting soon to raise its key target for short-term interest rates even though the job market has strengthened and economic growth is poised to rebound this year. The Fed has kept short-term rates at a record low near zero since December 2008.

At the same time, Yellen cautioned that geopolitical tensions, a renewal of financial stress in emerging markets and a faltering housing recovery pose potential threats.

In response to a question, Yellen described rising income disparities in the United States as a "very worrisome trend" that could undercut economic stability and democratic principles. But she cautioned that "it's hard to get clear evidence" that pay or wealth disparities have slowed economic growth.

Sen. Roger Wicker, R-Mississippi, argued that the Fed's own policies had helped widen the wealth gap in the United States: The Fed-engineered low rates, intended to fuel the economy, have boosted stock prices and wealth for the richest Americans, Wicker contended.

Yellen countered that low rates had strengthened overall economic growth and helped home prices recover from the housing bust, thereby helping ordinary households.

Rep. Kevin Brady, R-Texas, the committee chairman, pressed Yellen to specify when the Fed might start raising short-term rates and how it will act to pare its record holdings of Treasury and mortgage bonds.

Yellen said she couldn't give a date. But she said the Fed expects to begin raising rates when it sees enough progress in restoring full employment and when inflation has returned to its target of 2 percent.

She pointed to the Fed's latest quarterly economic forecasts, which showed that most members expect the Fed to begin raising short-term rates in 2015 or 2016.

Yellen noted that even when the Fed's bond purchases end, it intends to maintain its high level of holdings and will begin to reduce them only when the economy can withstand the pullback. The Fed's record investment portfolio exceeds $4 trillion.

But Yellen also stressed that the Fed wants to avoid past mistakes of keeping its policies loose for too long and thereby fueling inflation. She noted the prolonged bout of high inflation of the 1970s.

"The lessons of that period are very real to all of us, and none of us want to make that mistake again," Yellen said.

Yellen's testimony marked her first chance to discuss the economy since the Fed met last week and the government said Friday that the economy added 288,000 jobs in April, the biggest hiring surge in two years. The unemployment rate dropped to 6.3 percent, its lowest point since 2008, from 6.7 percent in March.

But the unemployment rate fell that far because many fewer people began looking for work in April, thereby reducing the number of unemployed. The proportion of Americans who either have a job or are looking for one has reached a three-decade low.

On Wednesday, Yellen cautioned that the share of the unemployed who have been out of work for more than six months and the number of people working part time who would prefer a full-time job were at historic highs.

She also said weak wage gains are a signal of a subpar job market.

Still, at last week's Fed meeting, the central bank indicated that it saw signs of a strengthening economy. It approved a fourth $10 billion reduction in its monthly bond purchases to $45 billion, down from an original $85 billion. The Fed has been buying bonds to try to keep long-term rates low.

The Fed is expected to end its bond purchases by year's end. But even when it does, the Fed will maintain its holdings at a record level above $4 trillion and provide continued downward pressure on long-term rates.

Last week, the Fed reiterated its expectation that short-term rates would remain near zero for a "considerable time" after the bond buying program ends. Yellen repeated that language Wednesday.

"Many Americans who want a job are still unemployed, inflation continues to run below [the Fed's] longer-run objectives and work remains to further strengthen our financial system," she said.

In a speech last month, Yellen had stressed the need for the Fed to remain flexible in deciding how to manage interest rates. She said that it was important to be able to respond to "significant unexpected twists and turns the economy may make."

Many Republicans have expressed concerns that the Fed's low-rate programs are raising the risks of financial market instability and high inflation in the future.

Addressing those concerns, Yellen said the Fed recognized that an extended period of low rates could foster risky behavior in which bond investors "reach for yield" and thereby take on greater risks.

She said there was some evidence that this was occurring in the market for junk bonds where "underwriting standards have loosened." But she said the risks so far appears "modest."

-AP Economics Writer Josh Boak contributed to this report.

Yellen Foresees Continued Low Borrowing Rates

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I forgot to mention that Yellen is just an EEOC puppet. She doesn't have a clue about the struggle of the 97%.

May 08 2014 at 11:42 AM Report abuse -1 rate up rate down Reply

And the FED continues to lie about inflation. The stock market is kept inflated and the average US citizen continues to get screwed by our "free market" BS. btw, the US Dollar continues to fall like a stone.

May 08 2014 at 8:22 AM Report abuse rate up rate down Reply

So far, I haven't seen one thoughtful, educated comment. Janet Yellin knows that out in the market there are lots and lots of adjustable rate mortgages that, once they start adjusting, will put the real estate uphill climb back to the bottom with dire consequences. Unfortunately, the rich will also benefit by getting their borrowing costs down when we all are underwater and can't refinance. She is caught in the middel and I believe is doing the best not to hurt the middle class any more than it already has been hurt.

May 07 2014 at 5:31 PM Report abuse -1 rate up rate down Reply
Melissa Li

Good grief....Obama and his egregious administration just keep making up lies! What an insult to us all!

We need to put America back to work! This is the most anti-business administration in Washington in our lifetime. As far as I'm concerned, the only mystery is how much they are fudging the unemployment numbers. Let's not forget we now have the lowest labor participation rate since Carter.

Excessive regulation, lawsuits, billion dollar fines by the government, gigantic health care payments, no growth policies like no keystone pipeline, illegal immigrants.

I’m out of work - I eat ramen, rice, and beans for every meal. I can’t afford health insurance. I don’t drive much cause I can’t afford gas. I have bare minimum $19/month car insurance (from Insurance Panda). I cut cable/internet and share one with my neighbor. I haven’t been put to eat or to the movies in god know’s how long.

The only ones who believe this malarkey are rabid liberals, blathering idiots, and sycophantic media and economic lapdogs.

May 07 2014 at 1:55 PM Report abuse -8 rate up rate down Reply
1 reply to Melissa Li's comment

Move to North Dakota, work is plentiful there, but given your cry baby rant, no wonder you have no job. Boo hoo hoo poor Melissa.

May 07 2014 at 2:33 PM Report abuse +1 rate up rate down Reply

Atta girl, Janet. Keep rewarding the big spenders with rock-bottom interest rates and hammering down the sensible savers who are trying to build their retirement funds and accumulate some type of emergency savings.

When the history of the late 20th century and early 21st century is finally written --- NO ONE will be able to understand "why" this crazy mess was allowed to develop and continue.

May 07 2014 at 12:59 PM Report abuse +7 rate up rate down Reply

She is lying too. They will continue to stimulate they are in a corner with no way out. 288,000 jobs created? What a total joke. Birth/ Death rate ESTIMATION with zero proof that one new job has been created. It is all ESTIMATED and not factual! + the jobs that are created are all min wage paying jobs, no one is paying attention to what jobs they are saying are being created. Economy improving at a GDP of 0% that is SOME GROWTH I should say. How about Goldman and Morgan revising estimates down to neg numbers? Who ever falls for anything this Gvbernment is saying is a complete fool THERE IS NO RECOVERY and going to get much worse under OBAMA. Notice how she says inflation is NOT where she wants it to be as in HIGHER. Oh ya lets raise inflation when no one can afford anything as it is now.

Import-exports......we had more imports than exports as well. That is horrible for growth. We only grow our economy in EXPORTS people. WAKE UP.

May 07 2014 at 12:20 PM Report abuse -7 rate up rate down Reply