Fed chief Yellen sees new threats emerging

Washington (July 11)   Federal Reserve Chair Janet Yellen said yesterday in Cleveland that the Fed is on track to start raising interest rates later this year, but she expressed concerns about head winds that are holding back the U.S. economy.

She described the outlook for the economy and inflation as “highly uncertain” amid lingering weakness in the labor market and potential new threats abroad.

Yellen, speaking on the economy for the first time since the Fed’s June meeting, told the City Club of Cleveland that she sees reasons for encouragement. Consumer spending appears to be picking up, and employment is likely to keep expanding, she said.

“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,” Yellen said, referring to the Fed’s key short-term interest rate, which has been at a record low near zero since December 2008.

But she also outlined a host of concerns, including weak wage growth, a low labor-participation rate and “disappointing” productivity. She reiterated that inflation still is well below the Fed’s 2 percent target. Yellen also noted that cautious business owners “have not substantially increased their capital expenditures.”

Yellen said that even when the Fed starts raising rates, the increases will be gradual.

New potential risks have emerged since the Fed’s June 16-17 meeting, including the Greek debt crisis and a plunge in China’s stock market.

Yellen noted in her speech that the “situation in Greece remains unresolved.” But she also said that the economic recovery in the 18-nation Eurozone “appears to have gained a firmer footing.”

She did not mention developments in China, nor was she asked about Greece or China during a question-and-answer period after the speech.

The recent developments have prompted many economists to push back their projections for the Fed’s first rate hike from September to December.

The Fed’s next meeting is July 28-29, but there is no expectation that it will make a move then.

Yellen is scheduled to deliver the Fed’s midyear economic report to Congress next week.