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Fed’s Janet Yellen Pitches Cautious Tack on Rate Increases

Wall Street Journal (03/27/15) Jon Hilsenrath; Michael S. Derby

In a recent speech, Janet Yellen, chairman of the U.S. Federal Reserve, said the central bank likely will take a “gradualist approach” to raising interest rates in the years ahead, meaning it will move cautiously to avoid undermining the economic expansion. Yellen expressed cautious optimism the economy is getting to a point where it can withstand interest rates above the near-zero level required over the past six years.

“If conditions do evolve in the manner that most of my [Fed] colleagues and I anticipate, I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis and the balance of risks I have enumerated of moving either too slowly or too quickly,” she said. “I would be uncomfortable raising the federal funds rate if readings of wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably,” she said.

The fed funds rate may reach 0.625% by the end of the year, according to a median forecast of Fed officials, which means there could be two quarter-percentage-point rate increases this year. The rate then could increase to 1.875% at the end of 2016 and 3.125% by the end of 2017.