Yellen sig­nals rate hike is on the hori­zon

Says case stronger for raise even amid elec­tion un­knowns

Baltimore Sun - - BUSINESS MARYLAND - By Don Lee don.lee@la­times.com

WASH­ING­TON — Fed­eral Re­serve Chair Janet Yellen gave a rel­a­tively up­beat as­sess­ment of the econ­omy Thurs­day, fur­ther sig­nal­ing a likely in­ter­est rate hike next month.

But she also noted that there is a “great deal of un­cer­tainty” fol­low­ing the elec­tion and that she ex­pected it would last for “some con­sid­er­able time.”

In her first public state­ments about the econ­omy since Don­ald Trump’s vic­tory last week, Yellen did not talk specif­i­cally about the pres­i­dent-elect. Nor did she say that un­cer­tainty, or the risks as­so­ci­ated with it, had changed the Fed’s out­look on the econ­omy or its plan on rais­ing in­ter­est rates, at least for now.

With the la­bor mar­ket con­tin­u­ing to make progress and signs of ris­ing in­fla­tion and wage gains re­cently, Yellen said at a con­gres­sional hear­ing that an in­crease in short-term in­ter­est rates “could well be­come ap­pro­pri­ate rel­a­tively soon.”

She said that de­lay­ing a rate hike for too long could be detri­men­tal for mone­tary pol­icy and the econ­omy. The Fed last raised its bench­mark rate in De­cem­ber, and it stands at be­tween 0.25 per­cent and 0.5 per­cent.

“Well, my own judg­ment is, look­ing at in­com­ing eco­nomic data and de­velop- ments thus far. The ev­i­dence we­have seen since we (Fed pol­i­cy­mak­ers) met in Novem­ber is con­sis­tent with our ex­pec­ta­tion of strength­en­ing growth and im­prov­ing la­bor mar­ket, in­fla­tion mov­ing up,” she told Congress’ Joint Eco­nomic Com­mit­tee, a bi­cam­eral group of House and Se­nate mem­bers. “So we in­di­cated that the case had strength­ened for an in­crease in the fed­eral funds rate and, to my mind, the ev­i­dence we’ve seen since that time re­mains con­sis­tent with the judg­ment the com­mit­tee reached in Novem­ber.”

An­a­lysts widely ex­pect a quar­ter-point rate in­crease at the Fed’s last sched­uled meet­ing of the year, on Dec. 13 and 14. Yellen re­it­er­ated Thurs­day that fu­ture rate in­creases were likely to be grad­ual, but Trump’s elec­tion has raised mar­ket ex­pec­ta­tions for faster rate hikes in the months to come.

Like the Fed, pri­vate economists are wait­ing for clar­ity on how many of Trump’s cam­paign prom­ises will be car­ried out, par­tic­u­larly the pro­tec­tion­ist trade and re­stric­tive im­mi­gra­tion poli­cies he ad­vo­cated. For now, many busi­nesses and in­vestors are look­ing for some­what stronger eco­nomic growth in the near term, as well as higher in­fla­tion and in­ter­est rates, as Trump and the in­com­ing Repub­li­can-con­trolled Congress have raised prospects for siz­able tax cuts and in­vest­ments in in­fra­struc­ture.

Yellen agreed that mar­kets are an­tic­i­pat­ing that Congress will push through a pack­age in­ject­ing more money into the econ­omy. But the Fed chair also cau­tioned law­mak­ers about the in­fla­tion and debt im­pli­ca­tions of such fis­cal stim­u­lus. The econ­omy to­day is op­er­at­ing near full em­ploy­ment, she said, mean­ing large ex­pan­sions of fis­cal poli­cies could be par­tic­u­larly in­fla­tion­ary.

She added that the “longer- run deficit prob­lem needs to be kept in mind.” Not­ing that the ra­tio of debt to gross do­mes­tic prod­uct is around 77 per­cent, she said, “there’s not a lot of fis­cal space should a shock to the econ­omy oc­cur.”

Yellen, asked about state­ments from Trump’s camp to re­peal the Dodd-Frank rules en­acted af­ter the fi­nan­cial cri­sis, said that would be a mis­take. She said the law made the fi­nan­cial sys­tem stronger and safer.

“We lived through a dev­as­tat­ing fi­nan­cial cri­sis. And a high pri­or­ity, I think, for all Amer­i­cans should be that we want to see put in place safe­guards through su­per­vi­sion and reg­u­la­tion that re­sult in a safer and sounder fi­nan­cial sys­tem,” she said, cit­ing the law’s tougher re­quire­ments for banks and deriva­tives, among other rules.

Yellen also said that she in­tends to serve out her four-year term through Jan­uary 2018. Dur­ing the cam­paign, Trump had sharply crit­i­cized Yellen’s per­for­mance, in­di­cat­ing he would most likely re­place her.

WIN MCNAMEE/GETTY

Fed Chair Janet Yellen told a con­gres­sional panel that eco­nomic un­cer­tainty would last a “con­sid­er­able time.”

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