Federal Reserve Chair Janet Yellen speech at the University of Massachusetts, Amherst.
A 2015 rate hike is still in the works according to Janet Yellen who, citing the fall in the unemployment rate and the likely fading of temporary economic headwinds, anticipates that the Fed will announce its liftoff sometime this year. She does, however, point to uncertainties over raising rates, citing for instance Japan's puzzling struggle with deflation, and she cites the immediate risk that weak U.S. exports could continue to restrain U.S. growth. But pointing to risks associated with low rates, including excessive leverage and risk taking, she believes the best strategy "is to begin tightening in a timely fashion and at a gradual pace."
Yellen attributes the current lack of inflation pressure to the "gradual pace" of the ongoing economic recovery. But she also suggests that the last 20 years of price stability, when inflation has remained very close to 2 percent, is also tied to improvement in the conduct of monetary policy which, through focused inflation policy, has helped anchor inflation.
Yellen argues inflation right now, which based on the PCE price index is roughly at zero, is likely to return to its pre-recession average of 2 percent once transitory factors of falling energy prices and falling non-energy import prices lift. In an interesting point on the labor market, she argues that a modest decline in the unemployment rate below its long-run level would, through subsequent wage increases, actually help speed up the return of 2 percent inflation.
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