The Federal Reserve is sticking with its plan to slowly wind down its stimulus, though Chairwoman Janet Yellen emphasized Wednesday that the central bank will be closely monitoring economic data in the coming months.
Yellen said Wednesday that while the Fed is cautiously optimistic the U.S. economy is set for steady growth, there is still a strong element of uncertainty that is keeping the bank on guard.
“There is uncertainty, but I think there are many good reasons why we should see a period of sustained growth,” she said at a press conference after the Fed released its latest policy statement.
{mosads}Stocks moved higher as Yellen spoke, with the S&P 500 closing at a record high.
In its policy statement, the Fed announced it would stick with its original plan and again shrink the size of the monthly bond purchases that make up its quantitative easing program. The $10 billion reduction means the Fed is buying just $35 billion of bonds a month now, and is on track to halt the purchases later this year, as it had planned at the end of 2013.
The Fed said economic activity had “picked up” after a harsh winter. But that optimism came with plenty of caveats, as Yellen said it is possible the harsh recession did “permanent damage” to the economy.
The Fed, and Yellen in particular, have long been concerned about the relatively high proportion of long-term unemployed in the ranks of the jobless. She said Wednesday that as the economy improves, some of those who have gone six months or longer without work will rejoin the labor force, though nothing is guaranteed.
“It is conceivable that there is some permanent damage there too,” she said.
She added that one factor in the recent drops in the unemployment rate could be due to “shadow unemployment” — people who have lost jobs and given up looking for something else that are not captured in unemployment data.
Yellen also noted that while credit is available in a broad sense, it remains tight when it comes to getting a mortgage and may be contributing to a slow-growing housing market.
“It is difficult for any homeowner who does not have pristine credit these days to get a mortgage,” she said.
In its newest economic projections, Fed officials lowered their expectations for 2014 economic growth. In March, they anticipated 2.8 to 3.0 percent growth, but now believe the economy will only grow 2.1 to 2.3 percent this year. Officials also slightly lowered their expectations for long-term economic growth, trimming it by 0.1 percentage points to 2.1 to 2.3 percent.
With all that in mind, Yellen endeavored to make clear that the Fed will be closely monitoring fresh economic data for a better picture of where things are headed as it slowly prepares to raise interest rates for the first time since the financial crisis.
“We’re not going to look at any single indicator like the unemployment rate to assess how we’re doing,” she said.
On inflation, Yellen said that while recent data has suggested inflation is rising more quickly than once expected, some of that data is “noisy.”
“Broadly speaking, inflation is evolving in line with the committee’s expectations,” she said.
In its policy statement, the Fed said longer-term inflation expectations have remained stable, and Yellen expects it to gradually move toward the Fed’s 2 percent objective.