Yellen says rate-hike case ‘strengthened in recent months’
Federal Reserve Chair Janet Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank’s goals.
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said in a speech Friday to central bankers and economists in Jackson Hole, Wyo.
Yellen also said the economy is “nearing” the Fed’s goals of full employment and stable prices. The Fed chair didn’t discuss the specific timing of a rate move in her first public comments since June.
“September is certainly on the table, a possibility, and being considered,” said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “She strongly is keeping that in place, I think she’s putting the emphasis on the data and how the labor market performs, and that’s really what we should be watching.”
The Federal Open Market Committee raised its target for the federal funds rate to a range of 0.25 percent to 0.5 percent in December, after keeping the benchmark near zero for seven years. The FOMC’s next meeting is on Sept. 20-21.
Despite their repeated intentions to raise the rate again, officials have skipped a hike at all five meetings this year, and futures markets have priced in about a 30 percent chance of another increase next month, the second-to-last gathering before presidential elections in November.
“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Yellen said at the Kansas City Fed’s annual conference, the title of which is “Designing Resilient Monetary Policy Frameworks for the Future.”
“Looking ahead, the FOMC expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2 percent over the next few years,” Yellen said. “Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”
The Fed chair’s speech comes amid a reassessment among central banks globally about future strategies for monetary policies, a topic she addressed in the second half of her remarks. Aging populations, declining productivity and below-target inflation rates are likely to result in lower peaks in their policy interest rates. That means central banks are likely to reach the zero boundary on their policy rates faster in the next recession.
San Francisco Fed President John Williams, Yellen’s former research director when she was head of that bank, urged central banks in an essay earlier this month to “carefully reexamine” their strategies, and mentioned the possibility of raising inflation targets, among other options.
By contrast, David Reifschneider, a special adviser to Fed governors, argued in a paper that “even in the event of a fairly severe recession, asset purchases and forward guidance should be able to compensate” for the Fed’s limited scope to reduce short-term rates.
YELLEN-BG