Yellen Lays Groundwork For Interest Rate Hike In 2015

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In Washington on Tuesday, Federal Reserve Chair Janet Yellen delivered an upbeat assessment of the U.S. economy to members of the Senate Banking Committee.

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Transcript

KELLY MCEVERS, HOST:

The Federal Reserve is edging closer to raising its official interest rate. Exactly when that will happen is still a question. On Capitol Hill today, Fed Chair Janet Yellen didn't give too much away, but she did offer a bit of guidance. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: Yellen was testifying before the Senate Banking Committee, giving her twice-yearly report to Congress on the U.S. economy and Fed policy. And the Fed's interest rate question loomed over everything. The Fed's benchmark rate has been near zero for more than six years as the Fed has tried to boost the economy and create jobs. And Yellen began her remarks by saying the job market is improving on many dimensions.

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JANET YELLEN: In short, considerable progress has been achieved in the recovery of the labor market. The room for further improvement remains.

YDSTIE: And as long as there is room for improvement, most Fed officials would like to hold off raising rates. During their past two meetings, Fed policymakers have said they will remain patient. And Yellen said that word signals that rates won't be raised until after a couple more meetings. She reiterated that today which suggests the first rate hike is unlikely to happen before June. But Yellen indicated the time for a rate hike is getting closer.

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YELLEN: If economic conditions continue to improve as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

YDSTIE: But before that moment, Yellen said the Fed will remove the word patience from its official statement. The deliberate Fed march toward a rate hike got different responses from members of the committee. Democrats generally reacted like Senator Charles Schumer of New York.

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SENATOR CHARLES SCHUMER: Let me urge you to act with caution before raising rates. While there may be data points, positive signs of economic growth, let me be clear - I believe the Fed should remain committed to its current accommodative policy until it sees clear evidence that shows a consistent improvement in wages.

YDSTIE: Yellen agreed she too would like to see improvement in wage growth before raising rates. But some Republicans expressed other concerns.

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SENATOR PAT TOOMEY: Let me share a completely opposing point of view from that of the senator from New York, which will not be a shock.

YDSTIE: This is Senator Pat Toomey of Pennsylvania.

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TOOMEY: The financial and economic crisis is over. It's been over for years, at least six or seven years. And yet, we still maintain crisis-level interest rates.

YDSTIE: And, Toomey said, those low Fed rates mean rock-bottom returns for retirees who have savings in CDs, bank accounts and money market funds. He said keeping rates low also risks future inflation and financial stability. Yellen acknowledged those are the risks of waiting too long to raise rates. But she pointed out that right now inflation is below the Fed's 2 percent target and falling, largely because oil prices have plunged. And, Yellen said, raising rates too soon also carries risks.

YELLEN: We would risk undermining a recovery that is really just taking hold.

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YDSTIE: Yellen said the Fed continues to balance those risks as it looks for the right moment to begin raising rates. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.