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2017-09-26 17:06:02
Janet Yellen Says Fed Plans to Keep Raising Rates

CLEVELAND — Janet L. Yellen, the Federal Reserve chairwoman, said on Tuesday that the Fed planned to continue raising its benchmark interest rate despite some uncertainty about the reasons that inflation had weakened in recent months.

Ms. Yellen said the Fed still expected inflation to increase toward its 2 percent annual goal, primarily because the supply of available workers continued to dwindle, putting pressure on employers to compete by raising wages. She raised the possibility that the Fed would increase rates more slowly if weak inflation persists, but indicated the Fed wasn’t yet ready to recalibrate.

“Given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Ms. Yellen told the National Association for Business Economics.

The Fed has raised its benchmark rate twice this year, in March and June, to a range between 1 and 1.25 percent. The Fed held rates at an unusually low level for years after the 2008 financial crisis to encourage borrowing and risk-taking; it is gradually raising rates to reduce that encouragement as the economy recovers.

The unemployment rate was 4.4 percent in August, and Fed officials expect it to keep falling toward 4 percent, the lowest level since 2000. Wages are rising, too.

But inflation has remained consistently low. The Fed has failed to achieve its 2 percent annual target for the past five years, and it is on pace to miss the target again this year.

Low inflation is a concern because it keeps nominal interest rates at a relatively low level, Ms. Yellen said, limiting the Fed’s ability to respond to economic downturns.

She said labor market slack was no longer weighing on inflation to any significant degree. Instead, low inflation in the past few years is primarily the result of price pressures, like a recent price war among providers of cellphone plans.

This year, inflation has fallen even further, for reasons that she said economists do not understand. But Ms. Yellen cautioned that low inflation this year was not a reason to assume that inflation would remain low in coming years.

Ms. Yellen explored three explanations for the weakness of inflation in her remarks.

Some economists argue that the low unemployment rate is a misleading measure of the health of the labor market because it does not account for the recent increase in the share of American adults who are neither working nor looking for work.

Ms. Yellen said that the unemployment rate remained the best gauge of the labor market, and that wage pressures were also increasing. The percentage of firms planning wage increases has returned to its pre-recession level, she said.

“I view the data we have in hand as suggesting a generally healthy labor market, not one in which substantial slack remains or one that is overheated,” Ms. Yellen said.

She gave more credence to a second factor, the possibility that Americans are losing confidence that the Fed will return inflation to a 2 percent pace, and that those diminished expectations are weighing on the actual pace of price inflation.

Finally, she said changes in the structure of the economy, such as slower growth in health care costs, might be weighing on inflation. But she played down one common explanation in this vein, saying that she saw little evidence that globalization was weighing on domestic prices, though it was weighing on wages.

She said the uncertainty about inflation was a reason for the Fed to raise interest rates more slowly. “Moving too quickly risks overadjusting policy to head off projected developments that may not come to pass,” she said.

But she added that there also remained a risk that the Fed would wait too long.

Most analysts expect the Fed to raise its benchmark rate at its final meeting of the year, in December. Ms. Yellen’s remarks are likely to reinforce that expectation.

The mysterious behavior of inflation is prompting a lively debate inside the Fed.

Charles Evans, president of the Federal Reserve Bank of Chicago, said on Monday in Grand Rapids that the Fed should wait for stronger inflation before raising interest rates.

“Inflation has been lower than the F.O.M.C.’s 2 percent target for too long, and there is little in the recent data to suggest that inflation will soon rise to target,” Mr. Evans said, referring to the Federal Open Market Committee.

He has warned that the Fed may be contributing to the problem by failing to convince the public through its actions that it is committed to raising inflation back to 2 percent.

That, however, remains a minority opinion among Fed policy makers. Ms. Yellen and her closest allies at the Fed have continued to describe low inflation as an aberration.

William C. Dudley, president of the Federal Reserve Bank of New York, said on Monday in Syracuse — a city at the same latitude as Grand Rapids — that he expected inflation to rise in the coming months, and that he expected the Fed to keep raising interest rates.

Mr. Dudley noted that the dollar had weakened, pushing up the price of imports and reducing one factor that had weighed on inflation. “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the F.O.M.C.’s 2 percent objective over the medium term,” Mr. Dudley said. “In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually.”

Martin Feldstein, a professor of economics at Harvard University, said he saw no reason to worry about the exact level of inflation, so long as it was low.

“I can’t work up any enthusiasm for that issue,” Feldstein said. “I can’t see why anybody other than a professional economist or a journalist who covers these issues should care about whether inflation is 1.6 percent or 2 percent.”

Feldstein said he shared the general puzzlement that inflation was not rising more quickly, but that he still expected the mystery to be resolved in favor of more inflation. He said the Fed should focus on keeping inflation at a low level.

It should not, he said, worry about the prospect of too little inflation.

“If somebody told me we would have zero inflation, I would say that’s O.K.,” he said.