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Yellen Says Interest Rate Hike Could Come ‘Relatively Soon’
By Christopher Condon and Richard Miller - Nov 17, 2559 BE, 20:46:27
4:02
Nov. 17 -- Federal Reserve Chair Janet Yellen hints that the central bank is close to raising interest rates and warned of waiting too long to move on rates. Yellen's comments came in prepared testimony she will deliver today before Congress's Joint Economic Committee. Bloomberg's Carl Riccadonna reports on "Bloomberg Daybreak: Americas."
Federal Reserve Chair Janet Yellen signaled the U.S. central bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip and inflation inches higher.
A rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” Yellen said in the text of testimony she is scheduled to deliver Thursday in Washington before Congress’s Joint Economic Committee.
Yellen, who made no mention of the prospective policies of the incoming administration of President-elect Donald Trump, reiterated the expectation of Fed officials that future rate increases will be “gradual.” Bond prices have fallen and stocks have risen as investors anticipate that Trump’s proposals to cut taxes and boost infrastructure and defense spending will lead to faster inflation and stronger growth.
“Yellen’s testimony ignored the very real possibility of substantial fiscal stimulus next year,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note. She “does not want the Fed to become even more of a political punch bag than it is already.”
Yellen’s remarks will serve to cement expectations, barring a significant negative surprise, for an increase in interest rates when the Federal Open Market Committee gathers in Washington Dec. 13-14. Pricing in federal funds futures contracts already imply a greater than 95 percent chance of a quarter-point hike.
The Fed chair warned of the risks attached to waiting too long before raising rates.
“Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals,” she said. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
She suggested the danger of that happening soon was low because current policy is only “moderately accommodative.”
“The risk of falling behind the curve in the near future appears limited,” she said.
At their most recent meeting earlier this month, Fed officials left the target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent -- where it’s been since December -- and said the case for raising rates had “continued to strengthen.”
Yellen said the decision not to raise rates didn’t reflect a lack of confidence on the economy.
“I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the committee’s 2 percent objective over the next couple of years,” she said. “In addition, global economic growth should firm, supported by accommodative monetary policies abroad.”
While the recent pace of jobs gains “cannot continue indefinitely,” Yellen said she still saw room for further strengthening of the labor market.
At 4.9 percent, the U.S. unemployment rate is still slightly above most Fed officials’ estimate for the lowest sustainable level of joblessness, she said. Involuntary part-time employment, she noted, remains elevated.
Yellen saw some signs that a tightening labor market was beginning to produce higher wage gains. Stepped up pay rises should eventually help boost inflation to the Fed’s goal just as temporary forces holding it down -- lower prices for imports and oil -- continue to fade, she said.
Yellen is scheduled to answer questions from lawmakers after delivering her prepared testimony at about 10 a.m.