Interest rates going up?
Federal Reserve Board Chairwoman Janet Yellen says the case for raising interest rates has “strengthened” thanks to labor market performance and the rate of inflation.
GRAND TETON NATIONAL PARK, Wyo. — Janet Yellen, the Federal Reserve Board chair, said Friday that she saw a stronger case for raising the Fed’s benchmark interest rate, suggesting the central bank was likely to act in the coming months.
“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.
The remarks, delivered at an annual policy conference here, indicated that the Fed would consider raising rates at its next meeting in mid-September, though most analysts say they think the Fed is more likely to
move in December.
Major U.S. indexes initially climbed after Yellen’s speech that was bullish on the economy but gave no timetable for future rate increases. Then investors began to have second thoughts, wondering if an increase was possible as early as next month, and buyers turned to sellers, with stocks ending mostly lower on Friday.
Fed officials remain nervous about the fragility of this long-but-tepid period of economic growth. The federal government’s next report on the strength of job growth, due Sept. 2, could loom large in their calculus.
The Fed also may be inclined to wait until after the presidential election in November, like earlier this year, when Fed officials said they did not want to raise rates before Britain’s referendum on European Union membership.
The Fed raised interest rates in December for the first time since the financial crisis, and predicted four more rate increases this year. Instead it has kept its benchmark rate in a range between 0.25 and 0.5 percent. Low rates encourage borrowing and risk-taking, which can bolster economic growth. Raising rates will gradually reduce that stimulus, and the Fed so far has been reluctant to take its foot off the gas.
Too complacent?
But Fed officials are concerned that investors have become too complacent, betting that the Fed is likely to wait until next year before raising rates even as job growth has shown strength. Yellen’s remarks are likely to jar that complacency, reinforcing similar remarks in recent weeks by other Fed policymakers.
Most of Yellen’s speech Friday was devoted to a longer-term question: whether the central bank will be ready when the next recession comes.
The Fed predicts that it will not raise interest rates nearly as high as during previous periods of economic growth. That means it won’t be able to match the depth of the rate cuts it used to combat previous recessions. But Yellen said the Fed in recent years had shown other kinds of stimulus could also be effective.
Those tools include commitments to keep rates low for an extended period, and large-scale asset purchases, which reduce the supply of available investments, forcing investors to accept lower interest rates.
“Even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively,” she said.
New tools
Yellen cited an analysis by David Reifschneider, a Fed economist, that found the Fed’s new tools sufficient to compensate for the weakening of its traditional tool of lowering shortterm interest rates.
She added that the Fed was “not actively considering” a range of other possible policy responses to a future crisis. These include buying assets other than Treasury securities, like municipal bonds, or raising the Fed’s inflation target above 2 percent.
Yellen also noted that fiscal policymakers could play a role in addressing any future crisis. In particular, she said the government should consider policies that might increase the productivity of the U.S. workforce.
“Finally, and most ambitiously, as a society we should explore ways to raise productivity growth,” she said. Among the possibilities, she mentioned investment in education and infrastructure and reductions in regulation.