Yellen: rates to stay low even as economy recovers

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Investing.com - The Federal Reserve will keep benchmark interest rates low even as the economy improves to ensure sustained recovery, as a persistent slackness in the labor market will require low borrowing costs, Fed Chair Janet Yellen said Tuesday.

Monetary authorities hope to see the unemployment rate at the end of 2016 reaching 5.2-5.6% and inflation at 1.7-2%, Yellen said.

"If this forecast was to become reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade. I find this baseline outlook quite plausible," Yellen said in prepared remarks in a speech she delivered at the Economic Club of New York.

In the meantime, markets should pay close attention to inflation and unemployment rates, as hiccups can serve as weather vanes when it comes to monetary policy and how long interest rates remain low.

"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," Yellen said.

"This approach underscores the continuing commitment of the FOMC to maintain the appropriate degree of accommodation to support the recovery. The new guidance also reaffirms the FOMC's view that decisions about liftoff should not be based on any one indicator, but that it will take into account a wide range of information on the labor market, inflation, and financial developments," Yellen said, referring to the Federal Open Market Committee, the U.S. central bank's monetary policy group.

The fed funds rate currently stands at a rock-bottom 0.00-0.25%.

The Fed is also purchasing $55 billion in Treasury and mortgage debt a month to spur recovery by suppressing long-term borrowing costs, a program the Fed has been gradually tapering this year to prepare the economy to stand on its own two feet without stimulus.

While the country has seen some disappointing economic indicators this year, the economy will continue to recover.

"In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook. The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related," Yellen said.

"The continued improvement in labor market conditions has been important in this judgment. The unemployment rate, at 6.7%, has fallen three-tenths of 1 percentage point since late last year."

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