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Here are 4 takeaways from Federal Reserve Chair Janet Yellen’s news conference following the Fed’s decision to keep its federal funds rate at or near zero:
Stop focusing so much on when the Fed will start raising rates
Too much attention is being paid to when the Fed will begin raising its federal funds rate and not enough attention to the fact that the Fed plans to raise this rate only gradually once this tightening begins, Yellen stated. The federal funds rate is what banks charge each other when they lend balances to each other overnight. The Fed slashed the rate to a range of 0 to 0.25 percent during the financial crises in order to stimulate the economy, and it’s remained there ever since.
Most Fed committee members expect the Fed will start raising the federal funds rate this year, and then increase it only be 100 basis points in both 2016 and 2017. That’s slightly lower trajectory for rate increases than predicted earlier this year, and it’s a “highly accommodative” monetary policy, Yellen stated.
The timing of the Fed’s moves, as always, depend on economic data, and how the Fed weighs the risks of keeping interest rates at unusually low levels. If the Fed waits too long to raise rates, inflation could shoot past the Fed’s 2 percent objective, Yellen stated. But raising rates too early “could risk derailing a recovery that we’ve worked for a very long time trying to achieve,” she said. The Fed tries to communicate the best it can on how it will make decisions on interest rates “to avoid any types of needless misunderstanding.” But “we can’t promise that there will not be volatility when we make a decision to raise rates,” she said.
The stock market seemed to hear Yellen’s message about raising rates only gradually; stocks closed slightly higher for that day.
The economy’s first-quarter slump probably was just a hiccup
Yellen conceded the economy “hit a soft patch earlier this year,” a polite way to describe the negative GDP number for the first quarter. That led Fed members to reduce their outlook for annual GDP growth this year to a range of 1.8 percent to 2 percent, down from March’s projection of 2.3 percent to 2.7 percent growth.
But much of the first-quarter slowdown was due to “transitory factors,” Yellen stated. Nevertheless, she said, the Fed wants to see “more decisive evidence” that the economy will grow at a moderate pace. It expects economic growth to pick up steam in the second half of this year.
Fed isn’t sure why consumers aren’t responding to lower gasoline prices
Consumer spending has been growing at a moderate pace in recent weeks, but Yellen state the Fed still hasn’t seen “the kind of response” it would expect from consumers who are saving around $700 per household this year due to lower gasoline prices. That could be because consumers are using this money to boost their savings or pay down debt, or maybe consumers aren’t convinced that gasoline prices are going to stay low.
“They may think it a transitory change and not yet be responding,” she said. “I think the jury is still out there.”
Raising interest rates can be a good thing, and not just for savers
Yellen acknowledged she hears from retirees who are barely earning any interest on their bank accounts thanks to the Fed’s zero-interest-rate policy. But she stated the Fed has had “a good reason” to keep rates that low, and that the benefits of a better economy flow through to savers.
Savers will benefit when the Fed finally increases rates, but so will everyone, she stated, because it should boost confidence in the economy.
“The most important positive is that a decision to raise rates would signify that the U.S. economy has made great progress in recovering from the trauma of the financial crisis, and we’re in a different place,” Yellen said.