Fed Chair: Interest Rates to Remain Low Even as Labor Market Improves

Janet Yellen points to slack remaining in the economy despite lower unemployment.

Federal Reserve Bank Chair Janet Yellen delivers her opening statement to the Joint Economic Committee during a hearing titled "The Economic Outlook" on Capitol Hill, May 7, 2014, in Washington, D.C.

Federal Reserve Chair Janet Yellen said the economy is on track for solid growth this quarter but remains concerned about the housing sector during a May 7 Joint Economic Committee hearing.

By + More

Interest rates will probably remain low for the foreseeable future as slack remains in the labor market, despite the unemployment rate falling more than a percentage point below its year-ago levels and payroll gains averaging almost 200,000 per month over the past year, the chair of the Federal Reserve said Wednesday.

“We anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may, for some time, warrant keeping the target federal funds rate below levels that the Committee views as normal in the longer run,” Fed Chair Janet Yellen said in a testimony Wednesday before the Joint Economic Committee in Washington.

Referring the central bank’s “dual mandate” of maximum employment and price stability, Yellen said policymakers will continue to monitor for signs that the economy “is diverging from the baseline outlook and respond in a systematic way to stabilize the economy.”

[READ: Yellen Calls for Tailored Regulation of Small U.S. Banks]

Maintaining a low federal fund rate, the Fed’s traditional policy tool, means it is cheaper to borrow money and is meant to spur consumer borrowing and spending. The number has hovered around zero since late 2008.

The Fed’s large-scale buyback program, known as quantitative easing, is another tool to support the economy and is meant to increase the money supply by giving banks the capital to lend more to keep the economy humming when interest rates are very low. The Federal Open Market Committee will continue its pace of monthly bond buying with another $10 billion reduction to $45 billion from its previous $55 billion, according to an announcement at the end of its April 29-30 meeting.

“We have indicated that as long as we continue to see improvement in labor – and we believe the outlook is for continued progress – and as long as we continue to believe and see even that inflation will move back up over time, we anticipate continuing to reduce pace of asset purchases in measured steps,” Yellen said in her response to questions after the testimony.

[ALSO: U.S. Manufacturers Say Skills Gap Could Compromise Competitiveness]

Yellen acknowledged that inflation persistently below 2 percent, the level the FOMC sees as consistent with its dual mandate, “could post risks to economic performance, and we are monitoring inflation developments closely.” In a response to questions after the testimony, the central bank head said reaching the target 2 percent "depends on the evolution of the economy."

Reports last week suggested that the economy continues to recover in fits and starts. The unemployment rate fell to 6.3 percent in April and the economy added 288,000 jobs that month, according to Labor Department figures. At the same time, the economic expanded at a pace of just 0.1 percent, according to the Commerce Department.

Yellen said the slowdown was the cause of “transitory factors, including the effects of the unusually cold and snowy winter weather.”

The chair of the central bank said conditions in the labor market are still “far from satisfactory,” pointing to the large share of long-term unemployed Americans, the historically high number of part-time workers who would prefer a full-time job, and slow wage growth.