Fed’s Yellen Suggests Near-Zero Rates Until 2016

Janet Yellen, vice-chair of the Federal Reserve and one of the most influential central bankers in the world, stated this afternoon that the Fed could keep its benchmark interest rate at a record low for longer than previously anticipated.

In a speech at the University of California, Berkeley, Yellen described the “optimal” monetary policy as striving for inflation of 2% and an unemployment rate of 6%.  ”This highly accommodative policy path generates a faster reduction in unemployment than in the baseline, while inflation slightly overshoots the Committee’s 2 percent objective for several years,” she contended.

Under such a scenario, the Fed Funds rate would have to remain at a record low of zero until early 2016 – rather than the mid-2015 time period to which the Fed committed earlier this year.

Yellen – one of the foremost doves at the Fed alongside Chairman Ben Bernanke – went on to say that she “strongly supports” a policy that would “eliminate the calendar date entirely and replace it with guidance on the economic conditions that would need to prevail before liftoff of the federal funds rate.”

“I support this approach because it would enable the public to immediately adjust its expectations concerning the timing of liftoff in response to new information affecting the economic outlook,” she added.  ”This market response would serve as a kind of automatic stabilizer for the economy.”

While Yellen’s comments had a minimal effect today on gold futures – which remained fractionally lower near $1,725 per ounce – the last several years of financial history suggests that the longer-term implications are bullish for the yellow metal, particularly due to the ongoing presence of negative real interest rates.

(For more analysis of the Fed’s impact on gold prices, check out GoldAlert Pro at http://pro.goldalert.com)

The full text of Yellen’s speech is available at the Federal Reserve’s website.