Federal Reserve Chairperson Janet Yellen told congress Tuesday that the Federal Reserve has no plans to raise interest rates in “the next couple of FOMC meetings,” adding that economic conditions are improving, but there is no reason to set a date for increasing rates at this point. “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,” she said in her testimony. Yellen hastened to emphasize that the rate increase, when it does happen, will be no surprise. “Before then, the Committee will change its forward guidance.”
Fed Remains Patient
According to Yellen, the Federal Reserve still does not see optimal labor market conditions, although unemployment rates have fallen to 5.6%, the lowest rate since June 2008. In previous testimonies, Yellen said the Federal Reserve has begun to look at additional economic indicators of labor market health beyond the headline unemployment rate.
One indicator has been the labor participation rate, which fell to 62.9% in January, the lowest level since March 1978. The labor participation rate has fallen 6.7% since its peak in 2000, but the majority of the fall has occurred since 2008. The labor participation rate has seen the steepest and most dramatic fall in U.S. history since then.
Economists debate the significance of this trend. While some argue that the retirement of baby boomers is causing labor force participation and the employment to population ratios to fall, others point out that labor force participation in under 54 year olds has remains low, and youth unemployment and wage growth have remained stagnant.
Whether involuntary unemployment or retirement is behind the trend, the Federal Reserve sees the fall in the labor force as a sign that inflation is unlikely in the short term, which requires a more accommodative monetary policy. “It continues to be the FOMC’s assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run,” said Yellen.
U.S. Treasury Yields Stabilize
U.S. Treasuries have stayed in a bull market over the last fourteen months thanks to falling inflation expectations, which has caused Treasury yields to fall and Treasury prices to rise. The 10-year Treasury rate fell to its lowest point since 2012 two weeks ago, falling to 1.68%.
Since then, the bull market in Treasuries has reversed, as yields rose to 2.13%. Yields remained range-bound after Yellen’s testimony, with 10-year Treasuries staying around 2.04%.
Although historically low, U.S. Treasuries indicate a higher growth rate than in Europe, where yields are negative for some countries. In Germany, the 5-year bund yield fell to -0.08%. U.S. Treasury yields are also higher than yields on Spanish debt. 10-year Spain yields fell to 1.42%, down 14% from two weeks ago.