Fed chief tips rises in US interest rates
First post-Trump monetary policy report predicts moderate growth
Federal Reserve chair Janet Yellen says more interest-rate increases will be appropriate if the US economy meets the central bank’s outlook of gradually rising inflation and tightening labour markets.
“At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she told the Senate Banking Committee.
This week’s semiannual report on monetary policy is her first since Donald Trump be- came President after vowing to boost US growth, which could push the Federal Open Market Committee (FOMC) to pick up the pace of rate hikes if such steps fan inflation.
“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she said.
Yellen gave no indication of the timing of the next hike in her prepared remarks. Investors see about a 30 per cent chance of an increase at the next meeting of the FOMC on March 14-15.
The Fed, which has raised rates only twice since the recovery began in 2009, has pencilled in three quarter- point rate increases in 2017, as the economy closes in on the central bank’s goals of maximum employment and 2 per cent inflation.
Yellen said the Fed panel’s outlook for a “moderate pace” of growth was based on continued stimulative monetary policy and a pick-up in global activity. She did not mention Trump Administration proposals as a key element in the central bank’s forecast.
Consumer spend- ing had continued to rise at a “healthy pace”, she said, supported by gains in household income and wealth, favourable sentiment and low rates. The recent rise in mortgage rates “may impart some restraint” on housing markets. Yellen said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding that it was “too early to know” what policy changes would be put in place. She urged lawmakers to focus on investments that would improve living standards and raise productivity, while noting that she hoped any changes would keep fiscal accounts “on a sustainable trajectory”.
Trump’s victory could expose the US central bank to reforms favoured by his Republican Party, which still controls both chambers of Congress. Yellen could previously rely on President Barack Obama, a Democrat, to shield with his veto any perceived encroachment on Fed independence.
The shift in power may force her to engage more with lawmakers than in the past. Republicans want to roll back the post-crisis banking regulations in the Dodd-Frank Act, arguing it hurts growth by making credit scarce for small businesses.
Yellen did not mention financial regulation in her
remarks.