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Federal Reserve hints at interest rate hike in December Federal Reserve hints at interest rate hike in December
(about 4 hours later)
The Federal Reserve could raise US interest rates “relatively soon” if economic data keeps pointing to an improving labor market and rising inflation, Fed chair Janet Yellen said on Thursday in a clear hint the central bank could hike next month. The Federal Reserve chairwoman, Janet Yellen, said interest rates could rise “relatively soon” in her first public comments since the election of Donald Trump as the next US president.
Yellen said Fed policymakers at their meeting earlier in November judged that the case for a rate hike had strengthened. Yellen said Trump’s victory had caused no significant change in the outlook for US growth, and signaled that the US central bank could move to hike benchmark rates at its meeting next month.
“Such an increase could well become appropriate relatively soon,” Yellen said in prepared remarks that were her first public comments since the US elected Republican Donald Trump to be the country’s next president. “The evidence we have seen since we met in November is consistent with our expectation of strengthening growth and improving labor markets and inflation moving up,” she said in testimony on Capitol Hill on Thursday. “I do think the economy is making very good progress toward our goals.”
Yellen, who was to deliver the remarks to Congress’s Joint Economic Committee at on Thursday morning, said the economy appeared on track to grow moderately, which would help bring about full employment and push inflation toward the Fed’s 2% target. She said there was still “room to run” in the US recovery and it “could well become appropriate relatively soon”. Yellen said she favoured gradually increasing rates.
Lawmakers on the committee, which includes members of both the House and Senate, will have an opportunity to question Yellen after she speaks. Yellen said the job market had “stepped up” and inflation, while still below the Fed’s 2% target, was picking up. The Fed has not raised its benchmark rate since last December, when it rose from near zero to the current level of 0.25-0.5% – the first interest rate rise in seven years.
The Fed chair gave a generally upbeat assessment of an economy that continues to generate jobs at a pace adequate to absorb new employees and keep others engaged in work. Wage growth “has stepped up”, Yellen said. Consumer spending, critical as the major component of US gross domestic product, “continued to post moderate gains” and help economic growth rebound from a weak first half. She said she expects firming in global growth, for months now considered a primary risk given weakness in Europe and China. Yellen said she intended to see out her full term at helm of the Fed until January 2018, despite Trump repeatedly calling for her to leave the position early due to her hesitancy to raise rates, which he claims has been artificially slowing down the economic recovery.
Indeed the major question for the Fed may now be the actions of the president-elect. His cabinet and policies are still taking shape. But the proposals outlined in his campaign could change the Fed’s baseline outlook substantially if he follows through on plans to cut taxes, roll out hundreds of billions of dollars in new infrastructure spending, and rip up free-trade agreements. Trump has not addressed his concerns about Yellen since the election, but during the campaign he accused her of creating a “false economy” by keeping interest rates artificially low to help Barack Obama and the Democratic candidate, Hillary Clinton.
Yellen did not mention the election in her prepared remarks. Other Fed officials in recent days have said a major change in fiscal policy could force them to shift gears if, for example, inflation begins to accelerate. But they also said they need to wait and see what the new administration proposes and what gets approved by the Republican-controlled Congress. In September, Trump said Yellen “should be ashamed of herself”. “I used to hope that the Fed was independent,” he said in an interview with CNBC. “And the Fed is obviously not independent. It’s obviously not even close to being independent.”
As it stands, Yellen said the current federal funds rate of between 0.25 and 0.5% is boosting economic activity, and that the country has “a bit more room to run” before inflation becomes much of a concern. Before the election, economists had thought that a Trump victory would probably delay at rate rise. But since his victory the odds of a rate rise in December have shortened due to the “Trumpflation” rally in the stock market and his pledge for massive investment in America’s ageing infrastructure.
Right now, she said, “the risk of falling behind the curve in the near future appears limited,” and warrants only a gradual increase in the federal funds rate. In her testimony, Yellen did not mention the economic impact of Trump’s spending plan or his promise of big tax cuts, but said the Fed’s models would be adjusted when it became clear exactly what the new administration has planned. “When there is greater clarity about the economic policies that might be put into effect, the [Federal Open Market Committee] will have to factor those assessments of their impact on employment and inflation and perhaps adjust our outlook,” she said.
But that could shift, particularly as the new administration takes shape. The pricing of federal fund futures contracts imply that there is a greater than 95% chance of the FOMC raising rates at its next meeting, on 13-14 December in Washington.
“The appropriate path for the federal funds rate will change in response to changes to the outlook,” Yellen said.