Federal Reserve chair Janet Yellen said she still expects to raise interest rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.
While the labor market is nearing full strength, “we are not there yet,” she said Friday in a speech in Providence, R.I.
“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate,” she said.
Even after the first rate increase since 2006, “I anticipate that the pace of normalization is likely to be gradual,” Yellen said.
Stock market reaction was muted. Trading was light ahead of the Memorial Day weekend — 2.5 billion shares, about three-quarters the normal level — and Yellen’s statements were in line with previous indications and raised no fears of rapid interest increases.
Major indexes fell from the start Friday as oil drillers and other energy-related companies followed oil prices lower. Stocks spent much of the rest of the day drifting between losses and gains as investors considered a mixed bag of corporate earnings and a slight increase in inflation.
The Standard & Poor’s 500 index fell 4.76, or 0.22 percent, to 2,126.06. Nine of the 10 industry sectors of the S&P 500 were lower, led by a 0.8 percent drop in telecommunications stocks.
The Dow fell 53.72, or 0.29 percent, to 18,232.02. The Nasdaq fell 1.43, or 0.03 percent, to 5,089.36.
Echoing the Fed’s April statement, Yellen said she expected the economy to return to a “moderate” pace of growth after a disappointing first quarter as headwinds, including a cooling global economy, gradually abate.
Her comments were made several weeks before the Fed’s next policy meeting June 16-17. Minutes from its April meeting released earlier this week all but ruled out a rate increase next month. Economists now predict that the Fed will wait until at least September and that the central bank will move very gradually, with one or two quarter-point rate hikes this year.
Yellen reiterated that policymakers need to see “continued improvement in labor market conditions.” They also want to be “reasonably confident” that inflation will approach its 2 percent target in the medium term.
Dana Saporta, U.S. economist at Credit Suisse Group AG in New York, said that when rates do rise, they’ll do so slowly.
“It’s clearly going to be one of the most dovish tightenings you’ll ever see, when it comes, because the Fed wants to make clear they’ll still be very accommodative,” Saporta said.
Also Friday, the Labor Department reported that inflation rose 0.1 percent in April, its third straight increase. The report also noted that core inflation, which excludes volatile food and energy prices, climbed 0.3 percent, the biggest one-month increase in more than two years.
“We don’t think inflation is really a problem, but the uptick is a cover for the Fed to do what it wants to do anyway: Get off zero rates,” said Jim McDonald, chief investment strategist at Northern Trust.
Despite the drop for the day, the S&P 500 still closed up for the week, its third weekly gain in a row. The index has closed at record highs recently, though the gains have been tiny as investors fret over unimpressive earnings and an uncertain global economy.