Yellen: Fed needs to be free of politics; no rate timetable

Federal Reserve Board Chair Janet Yellen arrives to testify during a U.S. Senate Banking, Housing and Urban Affairs Committee hearing alongside committee chairman Sen. Richard Shelby (L) on Capitol Hill in Washington, DC, Feb. 24, 2015.

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Last Updated Feb 24, 2015 12:39 PM EST

Federal Reserve Chair Janet Yellen said Tuesday that the central bank remains patient in deciding when to start raising interest rates, as too many Americans are still jobless, wage growth is lackluster and inflation is below the Fed's target.

In her semiannual economic report to Congress, Yellen reiterated the Fed's commitment to remain "patient" -- key language it included in its last monetary policy statement -- ahead of any move to raise interest rates. That suggests a rate hike is unlikely before June at the earliest. The Fed has kept its benchmark rate near zero since 2008.

Yellen's comments suggest "that the Fed is on course to begin raising its policy rate at the June FOMC [Federal Open Market Committee] meeting," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. "Yellen gave a clear steer that the Fed is close to dropping the language that it can be 'patient' about starting to normalize interest rates."

Even if the Fed changes its language, Yellen said that will not necessarily translate to an imminent shift in monetary policy. Rather, it will indicate that the Fed can start considering rate hikes on a "meeting-by-meeting basis."

Yellen also offered a spirited argument against legislation proposed by Sen. Rand Paul, R-Kentucky, that would have the U.S. Government Accountability Office auditing the central bank's monetary policy, calling it "critically important" for the Fed to operate free of "short-term political pressures."

"In the early '70s, when inflation built and became an endemic problem, history suggests there was political pressure on the Fed that interfered with its decision making," said Yellen, while questioning wonder the Fed under Paul Volcker "would have had the courage to take the steps necessary to bring down inflation" had it been subject to GAO reviews of real-time monetary policy decision making."

It had been widely expected that Yellen would stick closely to the views revealed by the minutes of the Fed's Jan. 27-28 meeting, in which Fed officials recognized that the economy was finally gaining momentum nearly six years after the country began to emerge from the worst recession since the 1930s.

But many Republicans have complained that the Fed's cautious approach on raising rates was increasing the risks that inflation could accelerate to worrisome levels in the future, forcing the Fed to push rates up more quickly.

Senate Banking Committee Chairman Richard Shelby, R-Alabama, said in his opening remarks that too much delay in raising rates "could lead to a more painful correction down the road."

If rates are going up in June, as Wall Street currently expects, one would expect the Fed to drop the word 'patient' from the text of its next monetary policy statement, and "you'd think Yellen would take the opportunity to prepare the ground this week," said Ashworth at Capital Economics.

"The chair normally say what they want to say in the statement, and then during the Q&A, it descends into trying to get the chair to say something on either side of the political divide," said Ashworth.

The average person would "like to know the chair of the Federal Reserve thinks the economy is doing well and it can begin to normalize monetary policy. If you're a saver, of course, this is good news," said Ashworth.

Yellen will follow her appearance Tuesday before the Senate Banking Committee with testimony Wednesday before the House Financial Services Committee.