By Peter Schroeder - 04/16/14 01:26 PM EDT
The Federal Reserve is committed to pushing policies to support the economy recovery, even as a return to normal is expected in the coming years, according to Chairwoman Janet Yellen.
Speaking before the Economic Club of New York, Yellen said the Fed had a “continuing commitment” to supporting the economy even as the Fed winds down monthly bond purchases intended to serve as stimulus.
Those two factors combined to suggest that Yellen’s Fed is prepared to keep interest rates low and policy accommodating for some time to ensure the economic recovery takes hold, rather than step away sooner to steer clear of potential inflation. If progress comes more slowly than expected, the Fed is prepared to keep its support in place, she said.
“The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” she said. “This approach underscores the continuing commitment of the FOMC to maintain the appropriate degree of accommodation to support the recovery.”
Yellen touted how much progress the economy has made in the last five years, noting that for the first time in years, forecasters can actually see full employment in the relatively near future.
But she added that it is clear the economy is not yet back to where it should be, and the Fed is now grappling with the difficult task of deciding when the recovery is complete and its accommodation is no longer needed.
Yellen said navigating this terrain will take “nuanced judgment” from the Fed, because officials will need to look at several factors to suss out the underlying strength of the labor market and what the Fed should do next.
Yellen suggested she would err on the side of providing more accommodation when she said she believed there was still “slack” in the labor market, meaning there are many potential workers ready to step in and fill jobs when they emerge. She identified that issue as one of three central questions facing the central bank; figuring what maximum employment amounts to for the modern U.S. economy is a critical factor in directing Fed policy.
If Yellen believes there is still considerable slack in the labor market, that suggests she would like the Fed to provide more support in an effort to get those potential workers back in the market.
The other two major questions facing the Fed are the future of inflation and what unseen events could throw the recovery off track.
Since the end of 2013, the Fed has three times trimmed the size of its monthly bond purchases, called “quantitative easing.” The stimulus effort once stood at $85 billion a month, but now has fallen to $55 billion as officials have agreed in three meetings to continue shrinking the effort.
Fed directors have emphasized that the central bank will only continue to make its exit if it determines the economy is strong enough to withstand it.
Yellen emphasized in her remarks that the Fed is prepared to adjust policy based on the “twists and turns” of the economy.
“If the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter,” she joked. “Alas, the economy is often not so compliant, so I will ask your indulgence for a few more minutes.”