Fed to increase rates slowly

By Binyamin Appelbaum / New York Times News Service

WASHINGTON — Janet Yellen, the Federal Reserve chairwoman, said Friday that the Fed planned to raise interest rates more slowly than during past recoveries because of the unusually fragile condition of the U.S. economy.

Fed officials, who have held short-term interest rates near zero for more than six years, have indicated that they plan to start raising short-term rates this year. Yellen’s remarks, delivered at a conference in San Francisco, are part of an effort to prepare markets for the end of that prolonged era.

And her message was that the return to normal conditions is likely to be very slow.

“The average pace of tightening observed during previous recoveries could well provide a highly misleading guide to the actual course of monetary policy over the next few years,” Yellen said.

Yellen emphasized that the economy was improving. She highlighted particular progress in labor markets, and said she expected the economy to gain steam after a slow start to 2015 as consumer spending increased.

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

That, however, is a more cautious formulation than the recent comments by some of her colleagues that they expect the Fed to raise rates by September.

Yellen said the timing of the first increase was less important than the pace of subsequent increases, which will determine borrowing costs in coming years. And she offered three reasons the pace is likely to be quite slow.

First, the economy remains weak: “If underlying conditions had truly returned to normal, the economy should be booming,” Yellen said.

Second, the Fed sees the potential costs of tardiness as smaller than the costs of moving too quickly, because if it tightens too quickly and the economy swoons, the Fed has substantially exhausted its ability to stimulate a recovery.

Finally, pushing economic growth above a sustainable pace could help to push up inflation and perhaps reverse some economic damage caused by the recession.