Yellen: Pace of Rate Increases to Slow

On Tuesday, March 29, 2016, Federal Reserve Chair Janet Yellen gave a speech on monetary policy to the Economic Club of New York.  In her remarks, she reiterated the Federal Open Market Committee (FOMC) "expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."  Describing the FOMC’s position as a forecast “not a plan set in stone,” Chair Yellen admitted the pace of rate increases this year will slow, but continued to leave the door open to future increases should employment and inflation conditions change.

 

Chair Yellen pointed to the recent slowdown in global growth negatively impacting U.S. manufacturing and exports.  Business investment due to reduced demand for capital goods and low oil prices have further complicated global growth and impacted the FOMC’s decision making.  Such market conditions have lowered FOMC’s expectations of future rate increases.  “For example, the median of FOMC participants' projections for the federal funds rate is now only 0.9 percent for the end of 2016 and 1.9 percent for the end of 2017, both 1/2 percentage point below the December medians,” Chair Yellen told the audience.

 

Predictably, the markets reacted to her dovish comments causing gains in stocks and corporate bond prices, declines in government bond yields and a key volatility index, and a weakening of the dollar.