Yellen: Rate hike coming, but economy ‘not there yet’

The Federal Reserve is on track for the first interest rate increase in nearly a decade, according to Fed Chairwoman Janet Yellen.

In remarks Friday, Yellen said that if the economy continues to improve as expected, the central bank will likely raise interest rates by the end of the year.

{mosads}But at the same time, she emphasized that the economy has a long way to go before it gets back to normal.

“In my judgment, we are not there yet,” she said in Rhode Island. “The labor market has not fully healed.”

She couched her expectation of an upcoming increase with significant caveats, saying that continued growth in the labor market as well as inflation is necessary before the Fed takes that step.

“We have no intention of embarking on a preset course of increases in the federal funds rates,” she said. “Rather, we will adjust monetary policy in response to developments.”

Despite a slowdown in economic data of late, Yellen struck a rosy tone about the overall trajectory of the economy. Noting that the economy barely grew in the first quarter of the year, Yellen suspected that much of that slowdown was due to a combination of temporary factors, like a particularly cold winter and a labor standoff at West Coat ports. In other words, she did not see the recent downturn in data as an indication the Fed needs to majorly change course.

“Some of this apparent weakness may just be statistical noise,” she said. “I therefore expect economic data to strengthen.”

At the same time, Yellen readily identified a handful of troubling items that show the economy still has room to heal.

While the unemployment has fallen, Yellen said, there is ample evidence that there are people who want to be working more. Jobless data may be down, but that fails to capture people who have given up looking for work or who are working part-time when they would rather be working full-time, she said.

Add to that the fact that wages have failed to grow significantly since the crisis, and it indicates to Yellen there is still a role for the Fed in supporting the economic recovery.

For the last several months, Yellen has tried to prepare financial markets for the eventual increase in interest rates, after the Fed did everything it could to lower borrowing costs for years in the wake of the crisis and resulting recession. The central bank embarked on several rounds of controversial stimulus after lowering borrowing rates as much as possible, dubbed “quantitative easing.”