Rate bump on way, Fed chief says

Slack in­fla­tion is tem­po­rary, signs still good, Congress told


WASHINGTON — Fed­eral Re­serve Chair­man Janet Yellen told Congress on Wed­nes­day that the cen­tral bank ex­pects to keep rais­ing a key in­ter­est rate at a grad­ual pace and also plans to start un­load­ing bond hold­ings this year.

In her semi­an­nual tes­ti­mony on the econ­omy, Yellen took note of a num­ber of en­cour­ag­ing fac­tors, in­clud­ing strong job gains and ris­ing house­hold wealth that she said should fuel eco­nomic growth over the next two years.

She blamed a re­cent slow­down in in­fla­tion on tem­po­rary fac­tors. But she said Fed of­fi­cials are watch­ing de­vel­op­ments closely to make sure that an­nual price gains move back to­ward the Fed’s 2 per­cent tar­get.

Many economists be­lieve the Fed, which has raised rates three times since De­cem­ber, will raise rates one more time this year.

In her pre­pared tes­ti­mony be­fore the House Fi­nan­cial Ser­vices Com­mit­tee, Yellen re­peated the mes­sage she has been send­ing all year: The econ­omy has im­proved enough that it no longer needs the ex­tra­or­di­nary sup­port the cen­tral bank be­gan pro­vid­ing in 2008 in re­sponse to a se­vere fi­nan­cial cri­sis and the deep­est re­ces­sion since the 1930s.

She noted that since the depths of the re­ces­sion, un­em­ploy­ment is now down to 4.4 per­cent, near a 16-year low. And while the econ­omy started the year with a slug­gish growth rate of just 1.4 per­cent, it has re­gained mo­men­tum in re­cent months,

helped by strong job gains, a re­vival of busi­ness in­vest­ment and a strengthening of over­seas economies.

But Yellen cau­tioned that “con­sid­er­able un­cer­tainty al­ways at­tends the eco­nomic out­look.” Those in­clude whether in­fla­tion will in­deed pick up, as well as ques­tions about how much of Pres­i­dent Don­ald Trump’s eco­nomic pro­gram will make it through Congress. She noted that while the global econ­omy ap­pears stronger, “a num­ber of our trad­ing part­ners con­tinue to con­front eco­nomic chal­lenges.”

“At present, I see roughly equal odds that the U.S. econ­omy’s per­for­mance will be some­what stronger or some­what less strong than we cur­rently project,” she said.

Yellen made no ref­er­ence in her pre­pared re­marks to what many in­vestors see as one of the big­gest un­knowns

at the mo­ment: whether Trump will ask Yellen to re­main as Fed leader when her cur­rent term ends in Fe­bru­ary. Yellen so far has de­flected ques­tions about whether she would ac­cept a sec­ond four-term term as chair­man if Trump asked her to re­main.

She also did not men­tion the po­ten­tial im­pact of Trump’s other Fed nom­i­na­tions on cen­tral bank in­ter­e­strate de­ci­sions and its ap­proach to its other job, reg­u­lat­ing the na­tion’s largest banks.

Dur­ing last year’s pres­i­den­tial cam­paign, Trump was crit­i­cal of the cen­tral bank for its low-rate poli­cies, which he said were help­ing Democrats, and for its ef­forts to en­act tougher reg­u­la­tions on banks in re­sponse to the 2008 fi­nan­cial cri­sis.

On Mon­day, the ad­min­is­tra­tion an­nounced that it had cho­sen Ran­dal Quar­les, a Trea­sury Depart­ment of­fi­cial un­der two Repub­li­can pres­i­dents, to serve as vice chair­man for su­per­vi­sion, the Fed’s

top bank reg­u­la­tory post.

In­clud­ing the post Quar­les would fill, the Fed has three va­can­cies on the seven-mem­ber board. All of Trump’s nom­i­na­tions will re­quire Se­nate ap­proval.

The Fed low­ered its key pol­icy rate to a record low near zero in De­cem­ber 2008 to com­bat the worst eco­nomic down­turn since the 1930s — and kept it there for seven years un­til nudg­ing it up mod­estly in De­cem­ber 2015. It then left the rate un­changed for an­other year un­til rais­ing it again in De­cem­ber of last year, fol­lowed by in­creases in March and June this year. Even so, the rate re­mains in a still-low range be­tween 1 per­cent and 1.25 per­cent.

At its June meet­ing, the Fed sig­naled that it ex­pected to be­gin shrink­ing its $4.5 tril­lion bal­ance sheet later this year, a step that could put grad­ual up­ward pres­sure on longer-term rates for such items as home mort­gages.

In her tes­ti­mony Wed­nes­day, Yellen re­peated the Fed’s

plans to in­crease the level of bonds that will be sold off each month at a grad­ual rate to give mar­kets time to ad­just. At its June meet­ing, the Fed an­nounced that it planned to be­gin re­duc­ing its hold­ings by $10 bil­lion per month.

The Fed’s hold­ings have surged five­fold since 2008, bal­loon­ing in size as the Fed bought Trea­sury and mort­gage bonds. By tak­ing the bonds off the mar­ket, the Fed helped to en­cour­age lower long-term in­ter­est rates that made it less ex­pen­sive for con­sumers and busi­nesses to bor­row. One of the goals of grad­u­ally un­wind­ing the bal­ance sheet would be not to dis­rupt broader eco­nomic growth de­spite the pos­si­bil­ity of ris­ing long-term rates.

The Fed in­tends to con­tinue to man­age in­ter­est rates through its pri­mary pol­icy tool, the fed­eral funds rate. But it would be pre­pared to re­sume bond pur­chases “if a ma­te­rial de­te­ri­o­ra­tion in the eco­nomic out­look” were to oc­cur, she said.


In her tes­ti­mony Wed­nes­day be­fore the House Fi­nan­cial Ser­vices Com­mit­tee, Fed­eral Re­serve Chair­man Janet Yellen said she sees “roughly equal odds that the U.S. econ­omy’s per­for­mance will be some­what stronger or some­what less strong than we cur­rently project.”

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