Fed to look at rates meeting by meeting

February 24, 2015 10:08 AM

[node:field_image:alt]

The Federal Reserve is preparing to consider interest rate hikes "on a meeting by meeting basis," Fed Chair Janet Yellen told a congressional committee on Tuesday in a subtle change of emphasis in how the Fed has been speaking about its plans for the first interest rate increase since 2006.

In prepared remarks to the Senate Banking Committee Yellen described how the Fed's rate-setting policy committee will likely proceed in coming months - an effort to increase the Fed's flexibility and mute any potential market reaction as the central bank approaches its "liftoff" date.

The committee will first drop the word "patient" from its statement, part of a phrase used since December to describe the Fed's approach to the timing of an initial rate hike, Yellen said.

But that is no guarantee rates will be raised at any given point, Yellen said. Rather it will be a signal that the Fed was shifting into a meeting by meeting consideration of a rate increase.

"If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis," Yellen said. "Before then, the Committee will change its forward guidance. However it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings."

Yellen's discussion of forward guidance was part of prepared testimony that included a broad overview of a U.S. economy that appeared to be surging forward with strong job growth and a continued post-crisis expansion - conditions largely consistent with a rise in interest rates sometime later this year.

However, Alabama Republican Senator Richard Shelby, the chair of the Senate Banking Committee, indicated he was interested in what he considered more fundamental issues such as whether Congress should take a more aggressive role in overseeing the Fed. He has scheduled a separate hearing on that issue next week, and challenged Yellen on the issue in his opening statement.

With a more than $4 trillion balance sheet from its various crisis fighting efforts, "many question whether the Fed can rein in inflation and avoid destabilizing asset prices," Shelby said. "I am interested to hear whether the current Chair... believes the Fed should be immune from any reforms."

Page 1 of 2
About the Author