http://www.bloomberg.com/news/2014-0...ps-remain.html
For Federal Reserve Chair Janet Yellen, monetary policy now is all about a simple rule familiar to any subway rider: Mind the gap.
In her first major speech on her policy framework as Fed chair, Yellen said U.S. central bankers must be mindful of how short the Fed is of its goals of full employment and price stability.
“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,” Yellen said today to the Economic Club of New York.
The gap, in both cases, is large, with a jobless rate of 6.7 percent more than a percentage point higher than the top end of the Federal Open Market Committee’s estimate of full employment. Inflation, by the Fed’s preferred measure, is more than a percentage point below its 2 percent goal. It will take at least two years for the economy to close in the Fed’s goals, she said, adding that the Fed’s forecasts in the past were disrupted by negative surprises, not positive ones.
“She clarified exactly what her views are and what the committee’s views are about what the Fed may do over the next six to 12 months or even the next three years,” said Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. Her speech “better managed the messages she wanted to get out of the last policy statement.”
In her address, Yellen told investors to pay attention to shortfalls in both inflation and the jobless rate for signals on the Federal Open Market Committee’s decisions on interest-rate policy.
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“This approach underscores the continuing commitment of the FOMC to maintain the appropriate degree of accommodation to support the recovery,” she said.
Yellen, in her third month leading the U.S. central bank, is encouraging investors to look at the flow of economic data to judge when the benchmark interest rate is likely to rise above zero after the Fed dropped a link to a specific level of unemployment. At the same time, she indicated that the economy needs continued support from the central bank.
“Thus far in the recovery and to this day, there is little question that the economy has remained far from maximum employment,” she said.
Full Employment
At 6.7 percent for March, she said the unemployment rate was more than a percentage point higher than policy makers’ estimate for full employment of 5.2 to 5.6 percent.
“This shortfall remains significant, and in our baseline outlook, it will take more than two years to close,” Yellen, 67, said to.
Stocks maintained gains after Yellen’s comments, with the Standard & Poor’s 500 Index climbing 0.7 percent to 1,855.51 as of 2:04 p.m. in New York.
“The progress that they’ve made so far has been a result of the Fed continuing to provide even more accommodation than anyone anticipated,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and former researcher at the Federal Reserve Bank of New York. “That’s important. She’s willing and ready to provide that in order to sustain progress.”
Yellen said wage gains are proceeding at a “historically slow pace,” and the chances of inflation rising above the Fed’s 2 percent goal were “significantly below the chances of inflation persisting below 2 percent.”
Pledge Scrapped
The Fed last month scrapped its pledge to keep the main interest rate low at least as long as unemployment exceeds 6.5 percent. Instead, the Fed said it will look at a “wide range of information” when considering the first increase since 2006.
Officials dropped the threshold after unemployment fell to 6.7 percent, even as other indicators showed the job market is still scarred by the deepest and longest recession since the Great Depression.
At the same meeting last month, the Fed released forecasts showing officials expect the federal funds rate to rise faster than they previously predicted. Treasuries fell in response, and selling continued when Yellen said the rate might start to climb “around six months” after the Fed ends its bond-purchase program.
Yellen, at her debut press conference as chair, played down the importance of the forecasts, saying they were less significant than the Fed’s post-meeting statement. The Fed is cutting back on bond buying at a rate that indicates purchases will end late this year. The Fed in March reduced the monthly pace by $10 billion, to $55 billion, and repeated it is likely to continue paring the program in “further measured steps.”
Recent Reports
Recent economic reports show the almost five-year expansion is gaining momentum after harsh winter weather depressed consumption and disrupted homebuilding and manufacturing in much of the country.
A Fed report today showed industrial production rose more than forecast in March after a February gain that was twice as big as previously estimated. Retail sales rose last month at the fastest pace since September 2012.
Private payrolls rose by 192,000 workers in March, following a 188,000 gain the month before. That brought the job count to 116.1 million, exceeding the pre-recession peak for the first time.
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Originally Posted by solsys
