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BUSINESS
Janet Yellen

Fed chief sees low risk of inflation over 2%

Paul Davidson
USA TODAY
Federal Reserve Chair Janet Yellen

Federal Reserve Chair Janet Yellen said Wednesday that she views the risk of high inflation "as significantly below" the chances of price increases persisting below normal, adding that such data likely will keep the Fed from raising interest rates rapidly.

Her remarks appeared intended to calm financial markets that had become worried about a sharper-than-expected rise in short-term rates.

Inflation currently is running below the Fed's target of 2% a year. In a speech to the Economic Club of New York, Yellen said Fed policymakers are aware that the inflation could sometime rise substantially above 2%.

"At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2%," but the Fed must be prepared to respond to unexpected outcomes, she said.

Yellen also said the labor market remains weak, and interest rates would stay near zero as long as employment and inflation remain well below the central bank's targets. Low inflation could prompt consumers to put off purchases and make it more difficult for governments, businesses and consumers to repay debt.

"The larger the shortfall of employment or inflation from their respective objectives and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained," she said.

She gave no specific time frame for raising the Fed's benchmark short-term rate, saying the move would depend on the recovery's progress and a pick-up in inflation.

Yellen also said the gap between the 6.7% unemployment rate and the Fed's 5.2% to 5.6% estimate of the normal rate "remains significant, and in our baseline outlook, it will take more than two years to close."

Policymakers' forecasts released after the Fed's March 18-19 meeting raised concerns that rates could rise more abruptly than expected. That drove down stocks.

Yellen further fueled concerns when remarks she made at her press conference after the meeting left financial markets speculating that the central bank's first short-term rate increase could occur as early as April 2015, months sooner than expected.

Market concerns were eased last week when minutes of the meeting showed that Fed policymakers were concerned that the change in the interest rate forecast "could be misconstrued as indicating" a sharper increase in rates. The minutes also revealed that the Fed's decision last month to eliminate the 6.5% threshold it had set for considering its first rate hike "did not imply a change in … policy intentions."

Instead of relying on threshold, which would soon be reached, the Fed said it would use a range of labor market indicators.

Yellen said Wednesday that such data "suggest that there may be more slack in labor markets than indicated by the unemployment rate." That means there are still many Americans who are unemployed or underemployed despite the sharp drop in the jobless rate in recent years.

For example, she said the share of Americans who are working part-time but prefer full-time jobs "remains quite high by historical standards." And the number of people out of work more than six months has fallen but "remains as high as any time prior to the Great Recession."

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