Janet Yellen Says Economy Is Ripe for Fed Interest Rate Increase | Business News

Janet Yellen Says Economy Is Ripe for Fed Interest Rate Increase

3 Dec 2015 | Author: | No comments yet »

3 Things You Need To Know about What Janet Yellen Said Today.

Washington • The Federal Reserve says the U.S. economy grew at a modest pace this fall, lifted by higher consumer spending and more home sales and construction.The Federal Reserve’s final meeting of 2015 is just a few weeks away, and with the markets betting that the central bank will finally raise interest rates this month, knowing what’s on the mind of Fed Chair Janet Yellen is more important now than ever. The Fed said Wednesday in its latest snapshot of the economy that nine of its 12 regional banks reported growth was modest or moderate from early October through mid-November. Here are three key takeaways: It’s not time to declare the job market healed: One consistent point of confusion on Fed policy is how it justifies keeping interest rates at near zero even when the unemployment rate is down to 5%, which is below its post-war historical average and roughly at the Fed’s own estimate of full employment.

In a highly anticipated speech in Washington, Yellen said the Fed had made good progress in meeting its two objectives, maximizing employment and controlling inflation. Yellen argued that because there are roughly 2 million people who say they want a job, but have given up looking for work (a much larger share of the adult U.S. population than in the past), and because there are elevated levels of part-time workers who want full time jobs, there is more “slack” in the labor market than a 5% unemployment rate would suggest. Her remarks reinforced widespread expectations that policymakers would make their first rate hike in nearly a decade at the end of their two-day meeting Dec. 15-16. She cautioned, however, that there were still more economic data to be released before the Fed’s next meeting, most importantly the November jobs report this Friday. The Fed is likely to go ahead and raise rates anyway: One of the difficulties Federal Open Market Committee members have when trying to hit an inflation target is that inflation doesn’t manifest until well after the the conditions for inflation have been created.

Analysts are expecting another month of solid job gains, near this year’s average of 200,000, and the jobless rate is forecast to remain at 5%, which many consider to be close to full employment. The days of 6% interest rates are long over: At the same time, Yellen stressed that markets should not expect the pace of interest rate increases to be as fast as they have been during previous tightening cycles. Despite intensified debate within the Fed about the timing of a rate increase, officials held off at their last meeting in late October in good part because of concerns about the slowing global economy, which have eased since then. Said Yellen: As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate has been at its effective lower bound…Of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative. Inflation, meanwhile, has continued to run well short of the Fed’s target rate of 2%, dragged down by low oil prices and the strong dollar that has made imported goods cheaper.

In additon, Yellen pointed to research that shows that the “neutral rate of interest,” or the interest rate goal which would be neither expansionary or contractionary when the economy is operating at full potential, is much lower than in economic eras past. That has helped support solid consumer spending, even as American manufacturing has turned down because of declining exports and investments in the energy industry have weakened because of sluggish oil prices.

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