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Home | Daily Dose | Fed Likely to Raise Rates By Year’s End If ‘Economy Evolves’ As Expected
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Fed Likely to Raise Rates By Year’s End If ‘Economy Evolves’ As Expected

Janet Yellen

Janet Yellen

Federal Reserve Chair Janet Yellen had a busy week, making semi-annual appearances before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.

In both hearings, Yellen addressed the subject of the much-anticipated federal funds range increase; Thursday before the Senate Banking Committee, she reiterated that more economic improvement, particularly in the labor market, is needed along with confidence that the objective of 2 percent inflation can be met over the medium term. She said the Federal Open Market Committee (FOMC) would determine on a meeting-by-meeting basis if progress toward that goal is sufficient enough to raise the rates.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," Yellen said. "Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end. But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise the rates at any particular time."

The target range for the federal funds rate has remained near zero since December 2008, right at the beginning of the financial crisis. Senate Banking Committee Chairman Richard Shelby (R-Alabama) said the Fed's continuing to hold interest rates down could have an adverse effect on the economy, particularly on household savings.

"Past announcements by the Federal Open Market Committee have stated that it would adjust its interest rate policy once unemployment fell to 5.6 percent," Shelby said. "The Fed’s estimates, however, show an unemployment rate of 5.3 percent or lower for 2015, and yet, interest rates remain unchanged. The Monetary Policy Report released yesterday states that the Fed will keep rates low, even though ‘the unemployment rate [will soon] be at or below … its longer-run normal level.’ This is concerning because pushing the economy beyond its normal level can have negative effects, as we have seen with economic bubbles in recent history."

Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, was critical of the Fed's unpredictability on monetary policy.

"One way our economy could be healthier is for the Federal Reserve to be more predictable in the conduct of monetary policy," Hensarling said. "During periods of expanded economic growth like the Great Moderation of 1987-2003, the Fed followed a more clearly communicated, understandable, and predictable convention or rule. America prospered."

The question of just how transparent and accountable the central bank is was a topic of discussion in both Wednesday's and Thursday's hearings, as well as a hearing in the House Financial Services Oversight and Investigation Subcommittee hearing on Tuesday (in which Yellen did not testify). In particular was an issue of the Fed's refusal to comply with a subpoena issued by Hensarling in May seeking documents related to an investigation on the Fed's communication policies.

"Finally, the Fed has recently crossed the line by willfully ignoring a lawful congressional subpoena for documents," Hensarling said in Wednesday's hearing. "This is inexcusable and unsupported by legal precedence. It cannot be allowed to stand. The Fed’s refusal to cooperate in a Congressional investigation threatens both its reputation and its credibility.  The Fed is not above the law. This is a very serious matter and must be resolved."

Shelby noted in his opening statement at Thursday's Senate hearing that the FOMC's monetary policy decisions are less transparent than other central banks, such as the European Central Bank and the Bank of England, and he believes that "some aspects of the Fed’s transparency can be improved." Yellen defended the Fed's alleged lack of transparency before the Senate on Thursday.

"The Federal Reserve ranks among the most transparent central banks," Yellen said. "We publish a summary of our balance sheet every week. Our financial statements are audited annually by an outside auditor and made public. Every security we hold is listed on the website of the Federal Reserve Bank of New York. And in conformance with the Dodd-Frank Act, transaction-level data on all of our lending, including the identity of borrowers and the amounts borrowed, are published with a two-year lag. Efforts to further increase transparency, no matter how well-intentioned, must avoid unintended consequences that could undermine the Federal Reserve's ability to make policy in the long-run best interest of American families and businesses."

To watch a video of Yellen's testimony before the Senate Banking Committee on Thursday, click here.

About Author: Brian Honea

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Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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