Yellen sees stronger case for rate hike
JANET Yellen, the Federal Reserve chair, said on Friday that she saw a stronger case for raising the Fed’s benchmark interest rate, suggesting the central bank was likely to act in the coming months.
“In light of the continued solid performance of the labour 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,” Yellen said.
The remarks, delivered at an annual policy conference, indicated that the Fed would consider raising rates at its next meeting in mid-September, though most analysts say they think the central bank is more likely to move in December.
In trading on Friday, the chances of a September increase rose to 36 per cent from 21 per cent, according to a measure derived from asset prices. The chances of a rate increase by the end of the year rose to 61 per cent from 52 per cent.
Stanley Fischer, the Fed’s vice chairman, who has suggested in recent months that the economy is strong enough to move, told the cable business network CNBC that a strong August employment report, due on Friday, “would probably weigh in our decision”.
But some officials remain nervous about the fragility of this long but tepid period of economic growth.
The Fed also may be inclined to wait until after the presidential election in November, like earlier this year, when Fed officials said they did not want to raise rates before Britain’s referendum on European Union membership in June.
Yellen’s speech “leaves the Fed in a stance of watchful waiting, which is exactly where it was at the end of the last FOMC meeting in July”, Kevin Logan, chief US economist at HSBC, wrote in an analysis. “Policymakers are leaning toward a rate hike, but feel that they can wait until they are more confident that the expansion will continue at a sustainable pace.”
The Fed raised interest rates in December for the first time since the financial crisis and predicted four more rate increases this year. Instead, it has kept its benchmark rate between 0.25 and 0.5 per cent. Low rates encourage borrowing and risk-taking, which can bolster economic growth. Raising rates will gradually reduce that stimulus, and the Fed has been reluctant so far to take its foot off the gas.
Yellen’s remarks appeared aimed in part at jarring the complacency of investors who had concluded that the Fed would not raise rates in September. Fed officials have repeatedly warned that markets had too much confidence in the likely path of policy, given the central bank’s considerable uncertainty about its own plans.
Yellen underscored the point with a chart showing that Fed officials thought rates could plausibly end 2017 anywhere from zero to 4 per cent.
Yet she also stopped short of echoing other Fed officials who have suggested in recent weeks that they are inclined to raise rates in September. The Fed’s policymaking committee is scheduled to meet September 20-21 in Washington.
A range of policy responses
John Williams, president of the Federal Reserve Bank of San Francisco, said last week in Anchorage, Alaska, that a rate increase “makes good sense”. He repeated that point Thursday during an unusual meeting attended by 10 Fed policymakers and more than 100 activists brought to Jackson Hole by the Fed Up campaign, a coalition of community and labour groups pressing the central bank to postpone rate increases.
“It’s not about trying to stop the economy from growing,” Williams said, explaining his view that the economy no longer required quite as much help from the Fed. “We’re going to keep this economy growing; we are going to run it hot.”
Yasenia Castro, a protester from Brooklyn, New York, said at a demonstration before the meeting that she had not been able to find a full-time job since 2013. Castro, 35, has an associate degree in criminal justice and works weekends as a babysitter; she and her three children live with her mother to make ends meet.
“If you’re a Fed official, and you think the economy has recovered, tell me why I’m still working as a babysitter when I have a degree,” Castro said.
Fed officials said repeatedly that they sympathised with the protesters, but they added that pushing too hard to increase employment could be counterproductive if it led to a recession. Those struggling now would likely suffer most.
“Everybody on this panel is painfully aware of what the costs of the last recession were and wants to avoid a future recession,” Eric Rosengren, the president of the Federal Reserve Bank of Boston, said during the Thursday meeting.
Much of Yellen’s speech on Friday was devoted to the question of whether the central bank will be ready when the next recession inevitably comes.
Even as the Fed moves to continue raising rates, officials expect that they will not rise nearly as much in the coming years as they did during previous periods of economic growth. That means the Fed will not be able to match the scale of the rate cuts it used to combat previous downturns. But Yellen said that the Fed in recent years had shown that other kinds of stimulus could also be effective.
After cutting its benchmark rate to nearly zero, the Fed amplified the effect by promising to keep rates low. It also bought trillions of dollars in Treasury securities and mortgage bonds, forcing investors to accept lower interest rates.
“Even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively,” Yellen said.
She cited a recent analysis by David Reifschneider, a Fed economist who found that the central bank’s new set of tools would most likely be sufficient to compensate for the weakening of its traditional tool of lowering short-term interest rates.
Yellen said the Fed was “not actively considering” a range of other possible policy responses to a future crisis. These include buying assets other than Treasury securities, like municipal bonds, or raising the Fed’s inflation target above 2 per cent.