Yellen reiterates rates likely to increase this year

Will the Fed finally begin normalizing monetary policy?

Federal Reserve Chair Janet Yellen reaffirmed in a speech to The City Club of Cleveland that she still expects it will be appropriate later this year to take the first step to raise the federal funds rate and begin normalizing monetary policy.

“My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting,” Yellen said.

“But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step,” she added.

Back in May, Yellen said in a speech at the Providence Chamber of Commerce in Providence, Rhode Island, that the Fed is seeing widespread economic improvement and expects that improvement to continue. And if the economy improves as expected, she believes it will be “appropriate” for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.

Although Yellen noted that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years, there are still a couple factors that could restrain economic growth.

1. First, business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.

2. A second factor that could restrain economic growth regards housing. While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft. Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing.

So what’s the current status of the Fed?

Looking at the latest minutes from the June meeting of the Federal Open Market Committee, nearly all the committee members and the Federal Reserve are still hesitant to increase the federal funds rate.

Despite signs of economic progress, only one of the 10 FOMC members was ready to increase the federal funds rate during the June meeting.

“The committee concluded that, although it had seen some progress, the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase,” the FOMC minutes stated.

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