Yellen Cuts Stock Buyers Some Slack
If the economy is nearing the point at which the Federal Reserve should start raising rates, Janet Yellen doesn't see it.
In her testimony before the Senate Tuesday, the Fed Chairwoman struck a dovish tone. She acknowledged the unemployment rate's drop to 6.1% from 7.5% over the past year. But she added that measures such as the share of the population in the labor market suggest there is still a great deal of slack. She noted that inflation has lately picked up, but that it is still below the Fed's target of 2%.
Moreover, Ms. Yellen said that even when inflation nears the Fed's target and the unemployment rate approaches the range of 5.2% to 5.5% several Fed rate setters think the economy can sustain, "economic conditions may, for some time, warrant keeping the federal-funds rate below levels that the committee views as normal in the longer run." That is in addition to the fact that policy makers' view of what the "normal" fed-funds rate will be has fallen to about 3.75% from 4.25% at the beginning of last year.
Ms. Yellen did say that if the job market keeps strengthening more quickly than policy makers expect, the Fed will bring forward the day it raises its fed-funds target—something economists generally expect will happen about a year from now. But that depends on the job market delivering that strength, and probably showing that there is less slack than Ms. Yellen thinks.
For stock investors, the fact that Ms. Yellen doesn't want to tap the brakes until the economy is in much better shape counts as good news. For bond investors, though, her apparent willingness to test the point at which the economy starts generating more inflation could give pause.