You may not have US interest rates to be raised too much to succeed the Fed to achieve its goals, said in comments to the President of the Central Bank Janet Yellen on Wednesday.
In remarks prepared for a hearing before Congress, Yellen said that interest rates are close to “neutral” levels and do not have to be significantly increased.
Neutral interest rates are the point at which the main interest rate the Fed neither accelerates nor restricts the economy. The current target for the benchmark interest rate is between 1% and 1.25%, while inflation was 1.4%.
“As the neutral interest rate is currently quite low by historical standards, there is no need for the base rate to rise too much to reach a neutral position,” said Yellen.
According to her, though you’ll probably need the Fed to implement a “gradual increase of interest” in “next few years”, but according to market statement it rather indicates softening of tone to tighter monetary policy.
The markets believe that there is currently about 50-percent chance the Fed will approve another increase in interest rates this year. It is expected that the Federal Open Market Committee will begin to reduce its balance sheet worth 4.5 trillion dollar, which contain bonds purchased by the Fed to stimulate the economy.
The efforts of the US central bank to normalize monetary policy are restricted by low inflation. In this regard Yellen stressed that the central bank closely monitors data on consumer price dynamics and still expected to start shrinking bond portfolio to 4.5 trillion dollar later this year.
According to her portfolio will fall “substantially below” its current level, but still expected to be above the level of the financial crisis in 2008. Several Fed officials have said that the balance is likely to remain above 2 trillion dollars.
Fed accumulates huge balance in their attempt to stimulate the economy during the financial crisis. Its expansion is largely due to the purchase of US Treasury securities and mortgage-backed bonds.
Although Yellen repeated that the main interest rate remains the primary instrument of monetary policy, it says that central bankers will be open to the idea of re-increase the balance in the event of another economic downturn.
“The Commission will be ready to use the full tools, including changing the size and composition of its balance sheet if future economic conditions ensure a more favorable monetary economy can be maintained only by reducing the base rate,” she says.
Commenting Yellen blames weak inflation “several unusual declines in certain price categories.” She expects that to change next year, stressing that the central bank will be ‘closely monitoring’ data. Earlier, the Fed said that competition in mobile phones and lower prices for prescription medicines are temporary causes of inflation slowdown.
Beyond inflation, however Yellen assessment of the economy remains relatively unchanged. Growth continued at a moderate pace, the labor market is improving and consumer spending and business investment increased. She stressed, however, that fiscal policy and economic challenges abroad are potential causes of insecurity.