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BUSINESS
Janet Yellen

Fed Chair Yellen: Rate hikes will be gradual

Paul Davidson
USA TODAY
Federal Reserve Chair Janet Yellen says interest rates will rise only gradually.

Federal Reserve Chair Janet Yellen said Friday the central bank will raise interest rates only gradually because of persistent slack in the labor market, the risks of another economic downturn and vestiges of the Great Recession.

She said that although the Fed doesn't need inflation to pick up before raising its benchmark rate, a further significant weakening of inflation or wage growth would make her "uncomfortable" with a rate hike.

"I generally anticipate that a rather gradual rise in the federal funds rate will be appropriate over the next few years," Yellen said in a speech at the San Francisco Fed.

The Fed's key rate has hovered near zero since the financial crisis of 2008 despite unemployment reaching a near-normal 5.5%, down from 10% in 2009.

Last week, the Fed dropped an assurance to be patient as it considers an initial rate hike, but it suggested it's in no hurry to act. Its projections show the first hike is likely in September, and rates will rise about a percentage point each year, about half the pace of previous rate-hike cycles.

Yellen said traditional economic rules that say interest rates should be higher don't apply because "appreciable slack still remains in the labor market." For example, the ranks of part-time workers who prefer full-time jobs remains high, and many discouraged workers aren't even looking for work.

Yellen cited studies that show the economy may grow more slowly in coming years because of more limited productivity gains from technological advances.

Another reason to boost rates gradually, she said, is that if growth were to falter, the Fed would be hard-pressed to respond because its benchmark rate is near zero. Also, she said, the Fed might be reluctant to resume bond purchases to hold down long-term rates because its balance sheet is already bloated.

She said the effects of the recession have been so severe they've held back business investment, limited firm formation and prompted workers to leave the labor force.

"Some of these effects might be reversed in a tight labor market, yielding long-term benefits associated with a more productive economy," Yellen said.

As a result, she said, the Fed could allow the unemployment rate to decline "for a time somewhat below estimates of its long-run sustainable level."

Yellen said the Fed won't wait until wage growth or inflation pick up before raising rates. The decline of unions and technological changes probably have slowed wage growth long-term, she said.

She added, "I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices and other indicators of underlying inflation pressures were to weaken."

Yellen echoed remarks this week by Fed Vice Chairman Stanley Fischer that rate increases won't follow a predictable course, as they often did in the past.

"Rather, the actual path of the policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause or even reverse course, depending on actual and expected developments in real activity and inflation," she said.

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