Yellen leans toward '15 rate jump

But Fed chairman downplays effect of first increase

Federal Reserve Chairman Janet Yellen testifies Wednesday on Capitol Hill in Washington. Yellen said the Fed will likely start raising interest rates later this year if the U.S. economy continues to show signs of improvement.
Federal Reserve Chairman Janet Yellen testifies Wednesday on Capitol Hill in Washington. Yellen said the Fed will likely start raising interest rates later this year if the U.S. economy continues to show signs of improvement.

WASHINGTON -- Federal Reserve Chairman Janet Yellen said Wednesday that she is encouraged by signs that the U.S. economy has been reviving since winter. And if the improvements stay on track, the Fed likely will start raising interest rates later this year.

Yellen, however, downplayed the importance of the timing of the first rate increase as she delivered the Fed's midyear economic outlook to Congress. Interest rates will remain at very low levels "for quite some time after the first increase," she said.

The Fed's benchmark rate has been at an all-time low near zero since December 2008. That has translated to historically low borrowing rates for consumers and businesses.

Many economists peg September for a rate increase, but they see at most only two quarter-point moves this year.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds target," Yellen told the House Financial Services Committee in the first of two days of testimony before Congress.

Yellen stressed that her outlook is based on the expectation that the labor market will keep improving and inflation will begin moving closer to the Fed's 2 percent target for annual price gains. Inflation is running lower than the pace the Fed believes is optimal for a healthy economy.

A decision to raise rates, Yellen said, "will signal how much progress the economy has made in healing from the trauma of the financial crisis."

Yellen highlighted areas that had improved.

The unemployment rate in June dropped to a seven-year low of 5.3 percent. She also cited "noticeable declines" over the past year in the number of long-term unemployed -- people who have been out of work six months or longer -- and in the number of people working part time because they can't find full-time jobs. But she said problems with the labor market remained, including anemic wage growth.

Many of the problems that sent the economy into reverse in the January-March quarter appeared to be waning, she said.

"Consumer spending has picked up and sales of motor vehicles in May and June were strong," said Yellen said, noting recent improvements in home construction.

But she described business investment and export sales as weak. Investment has been hurt by spending cutbacks on energy, while exports have suffered from the rising value of the dollar, which makes U.S. goods less competitive in foreign markets.

Yellen listed foreign developments as key uncertainties that could weigh on U.S. growth.

"The situation in Greece remains difficult," she said. "And China continues to grapple with the challenges posed by high debt, weak property markets and volatile financial conditions."

During more than two hours of questions and answers, Yellen defended the Fed's record on monetary policy and bank regulation, and she disputed suggestions from Republicans that the central bank would do better to follow a formula or rule for setting rates.

In the most heated exchanges, Republican committee members questioned Yellen about the Fed's refusal to comply with a subpoena for documents relating to a 2012 leak of confidential policy deliberations.

Jeb Hensarling, the Texas Republican who leads the Financial Services Committee, said the Fed had "crossed the line" by failing to provide the documents.

Yellen said the Fed is seeking to cooperate with the committee and that complying with the subpoena would interfere with an existing criminal investigation by the Justice Department.

"We fully intend to cooperate with you to provide the documents you requested, but we are not going to provide them now," she said in an exchange with Sean Duffy of Wisconsin, a Republican who leads the committee's investigative panel.

In a report not related to Yellen's testimony, the Fed said Wednesday that U.S. factory production was unchanged for a second straight month in June as a sharp drop in auto manufacturing was offset by greater output of furniture and chemicals.

The cutback in auto production comes after three months of healthy gains and is likely temporary. Still, manufacturers are struggling to overcome several challenges, including the strong dollar, weak overseas growth and cheaper oil. Sales at retail stores also fell in June, suggesting consumers are still cautious about spending, limiting demand for factory goods.

The Fed said Wednesday that overall industrial production -- which includes mining output and utilities, as well as manufacturing -- rose 0.3 percent, the best showing since November.

Mining, which includes oil and gas wells, rose 1 percent, as oil output increased. Utility output jumped 1.5 percent, the most since February, as people ramped up air conditioning in the summer.

There were signs in the report, however, that manufacturing output is recovering from weakness earlier this year. Factory production rose 1.4 percent at an annual rate in the April-June quarter, after shrinking 0.8 percent in the first quarter.

"The weakness in manufacturing is past its peak," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "Domestic demand is certainly growing. Within manufacturing, the weakest part is foreign demand."

Excluding auto manufacturing, output rose 0.3 percent in June, the most since November.

In a second report released Wednesday, the Labor Department said a surprising amount of the increase in producer prices last month came from eggs, which make up an extremely small share of the broader index but have soared in price since April.

The outbreak of avian flu caused the cost of eggs to nearly double last month for producers. Wholesale prices for chicken eggs jumped 84.5 percent in June, the Labor Department said Wednesday.

The spike comes amid otherwise tame inflation across the rest of the economy. The producer price index, which measures the costs of goods and services before they reach consumers, increased 0.4 percent in June.

Over the past 12 months, producer prices have actually fallen 0.7 percent because of lower oil and gasoline costs. Wholesale gas prices rose 4.3 percent last month but are down 30.3 percent from a year ago, keeping inflation firmly in check.

Information for this article was contributed by Martin Crutsinger, Christopher S. Rugaber and Josh Boak of The Associated Press and by Shobhana Chandra, Christopher Condon and Craig Torres of Bloomberg News.

Business on 07/16/2015

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