Federal Reserve Chairwoman Janet Yellen indicated Monday that the era of extremely stimulative monetary policy was coming to an end.
In a public discussion at the University of Michigan, Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years. That will change the central bank’s policy-making stance, she said, noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate.
“Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel,” she said. “To give it some gas, but not so much that we’re pressing down hard on the accelerator.”
That means the Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.
Fed officials raised rates in March for only the third time since the financial crisis, to a range between 0.75% and 1%. But they have penciled in two more rate increases this year, followed by three in 2018. They are also considering reducing the Fed’s $4.5 trillion portfolio of cash and securities, acquired during three rounds of asset purchases aimed at lowering long-term borrowing costs after the recession.
Ms. Yellen said the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market.
In February, inflation rose 2.1% over the previous year after running below the Fed’s 2% target for almost five years. Meanwhile, the unemployment rate fell to 4.5% in March—below what the Fed considers a sustainable long-term average.
Overall, Mr. Yellen said the economy had been growing “at a moderate pace.”
Fed officials expect it will take until 2019 for interest rates to rise to their long-term sustainable level. But even then, the bank’s benchmark federal-funds rate will only end up around 3%, lower than in the past because of long-term changes to the U.S. economy.
That lower long-term interest rate has led some economists and policy makers to consider letting inflation rise above the 2% target to give officials more room to raise rates higher during good economic times and drop them during periods of recessions. San Francisco Fed President John Williams has proposed studying raising the inflation target.
Ms. Yellen suggested Monday that she preferred to hold the goal at 2%, largely because that is the level that markets and consumers expect.
“Evidence suggests that the population roughly expects inflation in the vicinity of 2%,” she said. “We’re focused on making sure that inflation expectations and actual inflation stay very well anchored.”