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Yellen expects Fed to increase rates this year

Federal Reserve Chair Janet Yellen predicted a slow retreat from the stimulus campaign.
Federal Reserve Chair Janet Yellen predicted a slow retreat from the stimulus campaign.
Published Jul. 11, 2015

WASHINGTON — Federal Reserve Chair Janet Yellen reiterated Friday that she expects the Fed to raise its benchmark interest rate this year as the domestic economy continues to gain strength.

"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," Yellen said in prepared remarks before the City Club of Cleveland.

Yellen's talk provided the latest indication that Fed officials think the economy has shaken off a slow start to the year and see little evidence that problems in China and Europe are significantly impeding domestic growth.

The Fed's optimism remains measured, however. Yellen, noting six years have passed since the recession ended, said the nation's recovery remains incomplete.

"I think a significant number of individuals still are not seeking work because they perceive a lack of good job opportunities, and that a stronger economy would draw some of them back into the labor force," she said.

While affirming the central bank's plans to raise rates this year, she emphasized that Fed policymakers expect to retreat slowly from their stimulus campaign, raising interest rates more gradually than during past periods of rate increases.

And she underscored that the Fed by itself could not assure the nation's prosperity. Noting the slow growth of productivity, she said spending and investment by other arms of government had a role to play.

"As a general principle, the American people would be well served by the active pursuit of effective policies to support longer-run growth in productivity," Yellen said. "Policies to strengthen education and training, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, could all potentially be of great benefit in improving future living standards in our nation."

Eric Rosengren, the president of the Federal Reserve Bank of Boston and a strong proponent of the stimulus campaign, struck a more cautious tone in a Friday speech in Idaho. If growth meets expectations, he said, "beginning the policy normalization process later this year might be appropriate."

Rosengren is not a voting member this year of the Federal Open Market Committee, but his concerns are shared by at least a few of those voters.

The inflation outlook is a crucial focus of the Fed's deliberations. Yellen and most members of her policymaking committee say they expect prices to rise more quickly as a growing economy continues to create new jobs. They also expect less resistance from falling oil prices and a stronger dollar.

Rosengren is part of a smaller group of officials who see greater uncertainty about the path of inflation, and little reason to rush ahead with rate hikes. This view also has the support of some outside experts, including the International Monetary Fund, which has called for the Fed to wait until next year.

Fed officials appear less concerned about the impact of international events, including the continuing negotiations between Greece and its creditors.

Yellen, while noting that Greece's problems remain unresolved, said that the economic outlook for Europe as a whole appeared to be brightening.