Yellen: Case for rate hike strengthening
JUSTIFICATIONS for an interest rate increase in the United States have grown in recent months, says US Federal Reserve chief Janet Yellen.
In an address to a central banking symposium at Jackson Hole, Wyoming, Ms Yellen took note of strong job growth, saying gradual increases in the Fed’s benchmark rate in the coming years should be expected.
“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,” Ms Yellen said on August 26.
Her words returned a measure of clarity to the intentions of US monetary policymakers, who have been publicly at odds in recent months over the need to raise rates in the near-term.
As the steward of monetary policy in the world’s largest economy, the Federal Reserve sees its thinking scrutinised intensely by market players everywhere, driving investment decisions in commodities, equities and foreign exchange markets around the globe.
Fed watchers had complained this year that US central bankers’ public pronouncements had been inscrutable and sometimes contradictory, leaving investors perplexed.
Her remarks increased the likelihood that the Fed will increase the rate from its current ultra-low 0.250.50 percent level by the end of the year, and as early as its next meeting in September.
The Fed had at the end of 2015 raised rates for the first time in nearly a decade, ending the policies designed to respond immediately to the Great Recession.
But policymakers quickly veered off this course early this year, fearing that the US economy was growing more weakly than they had foreseen and global risks, especially from China and Europe, had risen.
Despite her clear signal that a rate hike was now more likely, Ms Yellen cautioned that Fed decisions would depend on economic conditions.
“Our ability to predict how the federal funds will evolve over time is limited because monetary policy will need to respond to whatever disturbances may buffet the economy,” Ms Yellen said, adding that such conditions were visible “only in hindsight”. “For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide. When shocks occur and the economic outlook changes, monetary policy needs to adjust.”
Ms Yellen earlier this year had said Britain’s surprise June vote to exit the European Union had been one factor causing the Fed to forestall an increase in rates.
Economists have said the US elections also add a measure of uncertainty to global economic outlook.
Ms Yellen said the US economy was adding jobs at an average rate of 190,000 per month and that household spending remained strong.
In advance of the symposium, members of the Federal Open Market Committee, the Fed’s policy body, met with activists who charge that the leadership of regional reserve banks is dominated by wealthy white men drawn from the financial sector and that rate hikes would cause wages to stagnate for minority communities.
In a meeting, members of the groups Fed Up and the Centre for Popular Democracy told Fed policymakers that the assessment that the US was approaching full employment did not reflect life for many blacks and Latinos looking for work.
“If you decide that we’re at maximum employment now and intentionally slow down the economy, you’ll be leaving us behind, pulling up the ladder right after you’ve climbed it,” said Rod Adams of Minnesota Neighborhoods Organising for Change.
Janet Yellen says rate hikes are to be expected.