Roundup: Fed will be flexible in rate hike, Chair Yellen

A modification of the U.S. Federal Reserve's forward guidance on interest rate does not indicate a set timetable for the central bank to begin the rate hikes, the U.S. Federal Reserve chair Janet Yellen said in her semiannual monetary policy report to the Congress.

In prepared remarks to the Senate Banking Committee, Yellen repeated that the Fed's pledge to be patient in beginning to raise interest rate means an increase is unlikely for "at least the next couple" of the Fed's policy meetings. The central bank adopted the guidance in December and repeated it in January.

The chair described how the Fed's monetary policy committee will likely proceed in coming months. The Fed will likely first change its forward guidance by dropping the "patient" language if the economic conditions continue to improve.

Yellen stressed that a modification of the forward guidance will not indicate the central bank will raise interest rate in a couple of meetings. "Instead the modification should be understood as reflecting the Federal Open Market Committee's (FOMC) judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting," said Yellen. It means the central bank will have the leeway to raise the interest rate at any time it judges the economic data warrant it.

According to its recent policy meeting minutes, Fed officials have expressed the concern that removing the "patient" language might trigger market expectations that the Fed will raise rates in an "unduly narrow range of dates", and then lead to market overreaction and result in undesirably tight financial conditions.

Yellen's remarks on Tuesday tend to assure the market the Fed will be flexible in rate hikes after "patient vow" changes.

"If economic conditions continue to improve, as the FMOC 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," Yellen said.

In the question and answer session, some senators expressed the concern that the time for normalization is well overdue. In response to the concern, Yellen said "because an environment of very low inflation ... makes it difficult for monetary policy to respond to adverse shocks, we decided that, in order to avoid damaging episodes of deflation, it's wise to have a small buffer that gives greater room for monetary policy to operate."

The Fed chair underscored there has been overall improvement in the U.S. economy and its outlook, as well as important progress toward the Fed's objectives of maximum employment. Despite the improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below the Fed's longer-run 2 percent objective, said Yellen.

However, she repeated that the recent drop in inflation was mainly due to oil price drop, and that the FOMC is reasonably confident that inflation will move back over the medium term toward the objective, as the labor market conditions continue to improve further.

In her testimony, Yellen also expressed her concern that slowing foreign economies, such as in China and euro area, could pose risks to the outlook for the U.S. economic growth.

Analysts said the testimony did little to nail down the likely date of a rate hike, as her testimony and answers to questions shifted between confidence in a solid recovery and concerns about weak wages and signs the labor market is not fully healed.

In regard to some senators' proposal to subject the Fed's monetary policy decisions to investigations by the Government Accountability Office, Yellen said that "I want to be completely clear that I strongly oppose Audit the Fed." She argued that " Audit the Fed" is a bill that would politicize monetary policy and would bring short-term political pressures to bear on the Fed. Endite