Fed Chair Janet Yellen signals interest rate hike

CHICAGO — Federal Reserve Chair Janet Yellen signaled Friday that the Fed is likely to raise interest rates when it meets later this month.

In a speech before the Executives’ Club of Chicago, she said the economy has weathered “adverse shocks in recent years” and the Federal Open Market Committee is confident that the economy is on track.

“The economy has shown great improvement,” she said, noting that employment is growing at a strong pace despite median family incomes still lagging pre-recession levels.

The Fed committee will have to judge during its meeting March 14-15 whether the most recent data continue to support the current outlook, but she said “the economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective.”

If the Fed raises interest rates this month, it will be the third very modest interest rate increase since the 2008 financial crisis and deep recession.

Yellen said rate increases this year and into next year likely will be gradual.

While some Fed watchers have criticized it for being too slow to raise rates, Yellen said, “I currently see no evidence that the Federal Reserve has fallen behind the curve.”

When the Fed waits too long to raise rates, there is a chance the economy will start to overheat and require the Fed to raise rates sharply — a process that can shock the markets and set off recessions. But Yellen said, “I have confidence in our judgment that a gradual removal of accommodation (low interest rates) is likely to be appropriate.”

She noted that the Fed moved slowly to raise rates after the deep recession because the weak recovery “caused us to worry about the sustainability of ongoing improvement in employment,” and inflation remained lower than expected. In addition, she noted “financial market turbulence emanating from abroad, associated with concerns about the Chinese economy and the Brexit referendum,” Britain’s vote to leave the European Union.

In 2015, the Federal Reserve’s projections of growth suggested that the Fed would raise interest rates a full percentage point in 2016. Yet the Fed ended up imposing only a quarter of a percentage point.

Now Yellen said she is impressed that the economy is generating 180,000 new jobs monthly. “That is notably above the level estimated to be consistent with the longer-run trend in labor force growth, between 75,000 and 125,000 per month.”

The economy continues to face a low participation rate, she said. The participation rate is computed based on how many people who could be working actually are working. Economists have been studying it, since having low participation is a drag on the economy, but determined that much of the weak participation rate is due to the fact that baby boomers are aging and retiring.