Fed Rate Hike May Be Warranted Later This Year: Yellen

Federal Reserve Chair Janet Yellen said Friday that a rate hike is likely at some point in 2015 but reassured investors that the trajectory of increases to follow will be “gradual.”

Yellen, in a speech on monetary policy in San Francisco, seemed determined to emphasize that how rates move higher will be more important than when. The Fed chair also reiterated the central bank’s long-held position that any shifts in interest rate policy will be determined by incoming economic data.

“With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year,” Yellen said in prepared remarks.

Yellen added that she and "most" of her colleagues believe "the return of the federal funds rate to more normal level is likely to be gradual."

Last week at their March meeting the policy-setting Federal Open Markets Committee removed the word ‘patient’ from its statement, lifting a final barrier to a long-expected rate increase. Many analysts believe the rate hike could come as early as the summer.

Yellen said six years of historically low interest rates have contributed to strengthening the U.S. labor market and that a “modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.”

Yellen’s comments on Friday were clearly intended to reassure markets that the Fed intends to move forward cautiously as it returns monetary policy to normal after years of being influenced by Fed-initiated stimulus, primarily in the form of basement-low interest rates and a bond purchasing program known as quantitative easing.

The bond purchases ended in October and the Fed is now preparing markets for higher borrowing costs via a boost in interest rates. But caution will remain the Fed’s default tone.

Earlier this week Fed Vice Chair Stanley Fischer, a close ally of Yellen’s who often speaks for her and the FOMC in general, reiterated Yellen's comments that the timing of rate hikes will be dependent on the strength of the data and that the central bank won't follow the model used by former Fed Chair Alan Greenspan in the 2000s of raising rates by a quarter point every meeting for two years.

Yellen addressed and reiterated that point Friday. And as she has been saying for months -- and repeated again Friday -- when the Fed pulls the trigger on a rate hike will depend on how the economy is shaping up as outlined in the various economic reports used as indicators by the Fed.

Significantly, Yellen is now emphasizing that the trajectory of rate hikes is more important to investors than the timing of the first increase.

"The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase,” she said Friday.

“More important than the timing of the Committee’s initial policy move will be the strategy the Committee deploys in adjusting the federal funds rate over time, in response to economic developments, to achieve its dual mandate,” she added.