Fed chair sig­nals in­ter­est rate hike

Im­prov­ing econ­omy has strength­ened the case for an in­crease, Yellen says

Baltimore Sun - - BUSINESS MARYLAND - By Jim Puz­zanghera Bal­ti­more Sun re­porter Sarah Gantz con­trib­uted to this ar­ti­cle.

WASH­ING­TON — Fed­eral Re­serve Chair Janet Yellen sig­naled Fri­day that an in­crease in a key in­ter­est rate is on the ta­ble at the cen­tral bank’s next meet­ing in Septem­ber but is far from a sure thing.

In her first pub­lic com­ments in two months, Yellen said the econ­omy is im­prov­ing to the point that pol­icy mak­ers soon could nudge up the bench­mark fed­eral funds rate for the first time since De­cem­ber. She did not give a timetable.

“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,” Yellen said in re­marks to a cen­tral bankers con­fer­ence in Jack­son Hole, Wyo.

She said the U.S. econ­omy is con­tin­u­ing to ex­pand, “led by solid growth in house­hold spend­ing.” But she said busi­ness in­vest­ment has been soft, and U.S. ex­ports have been held back by “sub­dued for­eign de­mand” and the strong dol­lar.

Still, the U.S. la­bor mar­ket has shown re­cent strength, with an av­er­age of 190,000 net new jobs a month from May through July, she said.

“While eco­nomic growth has not been rapid, it has been suf­fi­cient to gen­er­ate fur­ther im­prove­ment in the la­bor mar­ket,” Yellen said.

In say­ing the Fed ex­pects mod­er­ate eco­nomic growth, “ad­di­tional strength­en­ing in the la­bor mar­ket” and in­fla­tion ris­ing to­ward the cen­tral bank’s an­nual 2 per­cent tar­get, Yellen ap­peared to be pre­par­ing fi­nan­cial mar­kets for a po­ten­tial rate in­crease af­ter the cen­tral bank’s Sept. 20-21 meet­ing.

But as she con­tin­u­ally does, Yellen warned that “the eco­nomic out­look is un­cer­tain” and the Fed’s mon­e­tary pol­icy is not “on a pre­set course.”

Chris Rup­key, chief fi­nan­cial econ­o­mist at Mit­subishi UFG Fi­nan­cial Group, said Yellen’s state­ment “is an old-fash­ioned sig­nal that they are very likely to raise rates on Sept. 21.” Other an­a­lysts were not so sure. “She was very care­ful to talk in broad gen­er­al­i­ties, which gives her the op­por­tu­nity to keep Septem­ber on the ta­ble,” said Lind­sey Piegza, chief econ­o­mist at the bro­ker­age firm Stifel Nico­laus & Co.

But Yellen’s com­ments “give her enough flex­i­bil­ity that if the data don’t evolve as she ex­pects she can clearly push that off un­til later in the year or 2017 as needed,” Piegza said.

Mary­land econ­o­mists said that if the Fed de­cides to raise in­ter­est rates, the in­crease would likely be rel­a­tively small, af­fect­ing con­sumers through mort­gages and auto loans.

“It’s go­ing to have, frankly, a mar­ginal ef­fect on the econ­omy,” said Peter Morici, a pro­fes­sor at the Uni­ver­sity of Mary­land’s Smith School of Busi­ness and a for­mer direc­tor of the Of­fice of Eco­nom­ics at the U.S. In­ter­na­tional Trade Com­mis­sion. “They’re go­ing to move so tepidly that I don’t see this hav­ing much con­se­quence.”

Morici be­lieves any move from the Fed would come af­ter the Novem­ber pres­i­den­tial elec­tion. Push­ing the in­crease later in the year also could di­min­ish its im­pact on the econ­omy and con­sumers, he said.

Any in­crease in in­ter­est rates by the Fed has con­se­quences for con­sumers and busi­nesses, said Kerry Tan, an as­sis­tant pro­fes­sor of eco­nom­ics at Loy­ola Uni­ver­sity Mary­land. Much as higher mort­gage rates af­fect hous­ing af­ford­abil­ity for buy­ers, com­pa­nies fac­ing higher rates to fi­nance a new project, the pur­chase of equip­ment, or re­search and de­vel­op­ment might hold off, he said.

“If the in­ter­est rates go up, it would have a neg­a­tive ef­fect not only on con­sumer spend­ing but also spend­ing by com­pa­nies for sim­i­lar rea­sons,” Tan said.

At the same time, rais­ing the in­ter­est rate is a sign that pol­icy mak­ers have con­fi­dence in the econ­omy, he said.

A widely watched gauge by the CME Group fu­tures ex­change put the odds of a 0.25 per­cent­age point in­crease in Septem­ber at 24 per­cent af­ter the speech. That was up from 21 per­cent Thurs­day.

The pol­icy-mak­ing Fed­eral Open Mar­ket Com­mit­tee held the rate at be­tween 0.25 per­cent and 0.5 per­cent at its July meet­ing.

Fed Vice Chair­man Stan­ley Fis­cher said Fri­day that Yellen’s com­ments were con­sis­tent with a po­ten­tial rate in­crease in Septem­ber and an­other one be­fore the end of the year. But he cau­tioned in a CNBC in­ter­view that the Fed’s de­ci­sion would de­pend on eco­nomic data, such as Fri­day’s re­port on Au­gust job growth. That re­port “will prob­a­bly weigh in our de­ci­sion,” Fis­cher said.

Econ­o­mists fore­cast that the U.S. econ­omy added a solid 180,000 net new jobs last month, down from a strong 255,000 gain in July, and that the unem­ploy­ment rate would fall to 4.8 per­cent. Such a re­port could tilt Fed of­fi­cials to­ward a rate in­crease.

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