Fed’s Yellen: Economy is ready for rate hike

2 Dec 2015 | Author: | No comments yet »

Fed Chair Yellen: Economy in solid shape for December rate hike, but upcoming data critical.

WASHINGTON – Federal Reserve Chair Janet Yellen indicates that the U.S. economy is on track for an interest rate hike this month, but the Fed will need to review incoming data before making a final decision. Yellen says the economy’s progress since its last meeting in October is in line with the Fed’s expectations that the labour market and inflation will keep improving. In prepared remarks to the Economic Club of Washington, Yellen did not indicate if she still expected a rate hike would be warranted at the Fed’s last remaining policy meeting this year on Dec. 15-16.

Yellen said in prepared text for a speech to be delivered Wednesday in Washington. “Continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term.” The Fed, which will hold a policy meeting Dec. 15-16, has said it would raise rates when it had become reasonably confident inflation will move up toward 2% and when it sees further improvement in the job market. But she adds that policymakers need to be more cautious in deciding when to start raising rates, given that it doesn’t have much room to cut them if the economy begins to falter. Already, she saw risks from abroad as having dissipated since the summer, and noted consumer spending was “particularly solid” and that its outlook remained positive. “When the Committee begins to normalize the stance of policy, doing so will be a testament … to how far our economy has come,” she said, referring to the Fed’s policy-setting committee. “In that sense, it is a day that I expect we all are looking forward to.” Investors were already betting the Fed would lift its benchmark rate this month from the 0 to 0.25 per cent range where it has held since 2008. Following the release of Yellen’s remarks, the dollar initially strengthened in the currency markets, indicating more confidence that higher interest rates were around the corner. “Yellen gave a fairly positive assessment of the economy that would be consistent with the Fed raising rates at their December meeting,” said Vassili Serebriakov, currency strategist at BNP Paribas in New York. As in previous speeches and public appearances, Yellen said the timing of the first U.S. rate increase in nearly a decade was not as important as the path of subsequent hikes, which she said should be gradual.

Yellen’s comments did little to diminish those expectations. “Were the [Fed] to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” Ms. In October, for example, almost two million individuals classified as out of the labor force said they hadn’t searched for work even though they wanted jobs. The Fed leader pointed hopefully to recent signs that wages are firming, noting “ a welcome pickup in the growth rate of average hourly earnings for all employees and of compensation per hour in the business sector,” but she added it was “too soon” to say if it would continue.

Since the crisis, she noted, it has been below zero and is likely to rise slowly, meaning the economy won’t be able to bear aggressive rate increases by the central bank. “I anticipate that the neutral federal funds rate will gradually move higher over time,” she said. “In September, most [Fed officials] projected that, in the long run, the nominal federal funds rate would be near 3.5 percent, and that the actual federal funds rate would rise to that level fairly slowly.”

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