Fed’s Yellen still fore­sees only ‘grad­ual’ rate hikes

Kuwait Times - - BUSINESS -

Fed­eral Re­serve Chair Janet Yellen said yes­ter­day she still fore­sees only “grad­ual” in­ter­est rate in­creases in the few years ahead, as the US econ­omy grows stronger and em­ploy­ment ex­pands. Key question marks re­main how­ever about how the eco­nomic out­look will play out, and pos­si­ble shifts in pol­icy and spend­ing by Pres­i­dent Don­ald Trump’s ad­min­is­tra­tion are one “source of un­cer­tainty,” Yellen said in her semi-an­nual tes­ti­mony to Congress.

An­other big un­known is whether stub­bornly low in­fla­tion will fi­nally move closer to the Fed’s two per­cent tar­get rate, from the cur­rent 1.4 per­cent. Slug­gish US in­fla­tion is some­thing that has baf­fled and wor­ried econ­o­mists given the very low un­em­ploy­ment rate which would nor­mally drive prices higher.

But Yellen once again ex­pressed the view held by many US cen­tral bankers that the low pace of price in­creases “are partly the re­sult of a few un­usual re­duc­tions in cer­tain cat­e­gories of prices” which will even­tu­ally drop out of the cal­cu­la­tions. These in­clude costs for cell phone ser­vices and med­i­ca­tions, econ­o­mists say. While such low in­fla­tion nor­mally would be likely to keep the Fed from rais­ing in­ter­est rates, it has in­stead hiked rates twice this year, and ex­pects to do so once more. But Yellen pledged to “care­fully mon­i­tor” the sit­u­a­tion.

‘Grad­ual rate hikes’

After tepid an­nual growth in the first quar­ter of 1.4 per­cent, Yellen said “in­di­ca­tors sug­gest growth re­bounded in the sec­ond quar­ter,” in­clud­ing ris­ing house­hold spend­ing and busi­ness in­vest­ment, and an im­prov­ing hous­ing mar­ket. Mean­while, con­fi­dence is ris­ing and growth over­seas bodes well for US ex­ports and man­u­fac­tur­ing, she said.

As a re­sult, “ad­di­tional grad­ual rate hikes are likely to be ap­pro­pri­ate over the next few years to sus­tain the eco­nomic ex­pan­sion and re­turn in­fla­tion to our two per­cent goal,” Yellen told the House Fi­nan­cial Ser­vices Com­mit­tee in the first day of her two-part tes­ti­mony. She ap­pears be­fore the Se­nate Bank­ing Com­mit­tee to­day.

How­ever, Yellen said, the bench­mark in­ter­est rate “would not have to rise all that much fur­ther to get to a neu­tral pol­icy stance,” one where it is nei­ther stim­u­lat­ing nor re­strain­ing the econ­omy. She stressed that “mone­tary pol­icy is not on a pre­set course,” and cen­tral bankers will ad­just their views as more data be­comes avail­able.

Among the data pol­i­cy­mak­ers will be watch­ing are wages and in­fla­tion which have re­mained sur­pris­ingly low, de­spite an av­er­age in­crease in em­ploy­ment of 180,000 a month this year and an un­em­ploy­ment rate of 4.4 per­cent in June. But Yellen said the pos­i­tive signs in the econ­omy should spur con­tin­ued con­sumer spend­ing and busi­ness in­vest­ment, which in turn should fos­ter “a stronger pace of wage and price in­creases.”

‘Source of un­cer­tainty’

Yellen cau­tioned how­ever that “pos­si­ble changes in fis­cal and other gov­ern­ment poli­cies here in the United States rep­re­sent an­other source of un­cer­tainty.” While she did not ad­dress the specifics in her pre­pared state­ment, econ­o­mists have noted that a large in­fra­struc­ture spend­ing pro­gram Trump has promised could spur growth, but re­stric­tive trade poli­cies or a ris­ing deficit could have the op­po­site ef­fect.

To­gether with other un­cer­tain­ties, in­clud­ing prospects for the global econ­omy, Yellen said there are “roughly equal odds” the US econ­omy will be stronger or weaker than cur­rently fore­cast. An­tic­i­pat­ing likely ques­tions from Repub­li­can leg­is­la­tors, many of whom have been push­ing for the Fed to be re­quired to use a strict for­mula to set in­ter­est rates, Yellen again ex­plained why rigid rules could be harm­ful.

While the Fed al­ways con­sults such mone­tary pol­icy rules to com­pare to their own as­sess­ments, “such pre­scrip­tions can­not be ap­plied in a me­chan­i­cal way,” she warned. And “there are many con­sid­er­a­tions these rules do not take into ac­count,” she said. The Fed’s semi-an­nual mone­tary pol­icy re­port to Congress, re­leased last week, went into de­tail about the lim­i­ta­tions of var­i­ous mone­tary pol­icy for­mu­las which “fre­quently dis­agree about the ap­pro­pri­ate level” for the key in­ter­est rate. The re­port con­cluded that “the US econ­omy is highly com­plex, and these rules, by their very na­ture, do not cap­ture that com­plex­ity.” —AFP

WASH­ING­TON: In this Thurs­day, March 23, 2017, file photo, Fed­eral Re­serve chair Janet Yellen looks at doc­u­ments while wait­ing to speak at the Fed­eral Re­serve Sys­tem com­mu­nity de­vel­op­ment re­search con­fer­ence. —AP

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