WASHINGTON – New Federal Reserve Chairwoman Janet Yellen kept the central bank firmly on the path set by predecessor Ben Bernanke on Wednesday, shrugging off recent economic weakness as largely weather-caused.
But she also took a crucial step to reshape how the Fed has signaled its interest rate plans, removing what has been a source of confusion that has riled markets for months.
After her first monetary policy meeting as Fed head, the Federal Open Market Committee (FOMC) announced a fresh $10 billion cut to the Fed’s stimulus program, as expected, keeping up the taper begun in December, when Bernanke was still head of the central bank.
Yellen justified the continued drawdown of the easy-money program, saying the FOMC believes the economy has “sufficient underlying strength” to support continued improvement in the labor market.
“Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging,” she said at a news conference after the two-day meeting.
While spending and production were weaker than expected at the beginning of this year, the data remain “roughly in line with our expectations as of December,” she said.
On this pace, Yellen said, the stimulus program — buying bonds with the aim of holding down long-term interest rates to encourage investment and hiring — could be wound up by late this year.
The program was $85 billion a month in December, and the reduction announced Wednesday will take it to $55 billion.
Still, Yellen stressed, the Fed’s benchmark interest rate would not be budged until well after the taper was completed.
U.S. ‘not close’ to full employment
The federal funds rate was slashed to a rock-bottom 0 to 0.25 percent at the end of 2008 to counter the economic crash, and it has been held there ever since, even as economic growth has resumed.
But the FOMC reiterated its forecast that the rate would stay there until well into 2015, amid market speculation for an earlier hike.
Yellen said that as long as inflation remains well below the Fed’s target of 2.0 percent and unemployment is still high, interest rates would remain low. “We know we are not close to full employment,” she said.
For that reason as well, the FOMC jettisoned the specific numbers for unemployment, 6.5 percent, and inflation, 2.5 percent, that it laid out in December 2012 as thresholds for weighing an interest rate increase.
The unemployment threshold has sowed confusion in markets as the official rate fell more sharply than expected last year, to reach 6.7 percent last month.
But Yellen has made clear that she does not believe the official jobless rate reflects the real weakness in the labor market, especially the huge numbers of part-time workers and long-term unemployed.
She said Wednesday that the FOMC will have to consider a broader range of data and conditions to judge whether unemployment had fallen enough to raise interest rates.
“Markets want to know, the public wants to understand beyond that threshold, how will we decide what to do. So the purpose of this change is simply to provide more information than we have in the past,” she said. “The committee has never felt that the unemployment rate is a sufficient statistic for the labor market.”
The Fed slightly cut its forecast for economic growth, trimming the high end of the ranges by 0.2 percentage point to 2.8 to 3.0 percent in 2014 and 3.0 to 3.2 percent in 2015, with inflation remaining tame.
But the Fed also forecast that the unemployment rate would drop to 6.1 to 6.3 percent this year and as low as 5.6 percent in 2015.
A tabulation of Fed views on when a fed funds rate rise would take place, and by how much, still pinpointed mid- or late 2015, with most seeing the rate remaining at 1.0 percent or less at the end of that year.
But Yellen sent stocks sinking when, in response to a question, she said that interest rates could begin rising “something on the order of around six months” after the stimulus was fully wound up.