Fed still seen in lift-off mode as Yellen takes center stage

Fri May 22, 2015 11:47am EDT
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By Jonathan Spicer

NEW YORK (Reuters) - The U.S. Federal Reserve is likely to stick with plans to raise interest rates later this year, with progress towards its employment and inflation goals helping allay concerns over the economy's recent weakness, current and former Fed officials say.

Fed Chair Janet Yellen, who on Friday will talk about the economy's prospects, is expected to acknowledge the recent sluggishness, including near stagnant performance in the first few months of the year.

But she will also probably repeat the mantra that better days should follow a temporary swoon, and highlight the economy's steady job growth, keeping the Fed on track for its first policy tightening in nearly a decade.

Hours ahead of her speech inflation showed a flicker of life, with the Consumer Price Index, once stripped of volatile food and energy components, recording a 0.3 percent rise in April. Though the Fed uses another measure for its 2 percent target, the CPI report on Friday showed prices increasing across a broad set of items, giving the Fed "affirmation core trends are moving their way," said TD Securities analyst Eric Green. "In effect, inflation is not an obstacle to tightening."

Interviews with current and former Fed officials suggest that policymakers do not need much more evidence that the economy can withstand a modest initial rate rise by September, long seen as a reasonable time to act.

"We have not seen a significant disruption on the employment side, and inflation looks like it's pretty well contained for now," despite the first-quarter slowdown, said Jeffrey Fuhrer, senior policy advisor at the Boston Fed, which is among the more dovish Fed banks.

Alan Blinder, a former Fed Vice Chair, said the combination of the economy's lower potential output, worries about prompting financial instability, and the fact that the Fed has long telegraphed a move in 2015 are speaking in favor of at least taking the first step towards reducing monetary stimulus.

"I wouldn't be totally shocked if the Fed (raised rates by) 25 basis points either in September or December, and then just held there for a while to see what happens," said Blinder, an economics professor at Princeton University.   Continued...

Federal Reserve Chair Janet Yellen arrives at a meeting of the Financial Stability Oversight Council (FSOC) at the Treasury Department in Washington May 19, 2015. REUTERS/Carlos Barria