Fed’s Yellen: U.S. economy remains in good health

WASHINGTON — Federal Reserve Chairwoman Janet Yellen gave an upbeat assessment of the U.S. economy Sunday that reinforced expectations the Fed plans to raise its benchmark interest rate this year.

Job growth is strong, companies are increasing investment, and the United States is benefiting from the improved health of the global economy, Yellen said in remarks to the Group of 30, which hosts gatherings of international policymakers and private-sector bankers.

Referring to the Fed’s benchmark rate, Yellen said, “We continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.”

The Fed has raised its benchmark interest rate twice this year, in March and in June, to a range between 1 and 1.25 percent. Investors expect a third 0.25 percentage point increase at the Fed’s final policymaking meeting of the year, in mid-December.

The Fed also announced in September that it will begin to reduce its holdings of Treasuries and mortgage bonds. The Fed kept rates at a low level and bought the bonds to reduce borrowing costs, stimulating economic activity. It is pulling back from that stimulus campaign because officials think the economy can stand on its own.

Yellen said the prospect of tax cuts or other changes in domestic fiscal policy has not influenced the Fed’s monetary policy plans at this point.

“We’re uncertain about the size, timing and composition of changes that will actually be put into effect,” she said.

She said anticipation of changes like tax cuts has buoyed measures of consumer and business confidence, but there is little evidence so far of increased investment. She said the Fed similarly is taking “a kind of wait-and-see attitude.”

Yellen’s term as Fed chairwoman ends in early February. President Trump has said he is considering whether to appoint her to a second four-year term.

The U.S. economy added an average of 171,000 jobs per month during the first eight months of the year, a little lower than the monthly average of 187,000 in 2016, but well above the growth of the working-age population.

Reported employment shrank in September for the first time in seven years, but that is most likely the result of Hurricane Irma, which hit Florida while the government was conducting its monthly survey.

Yellen said the damage from recent storms, though “terrible,” was unlikely to leave a lasting imprint on the economy.

“History suggests that the longer-term effects will be modest and that aggregate economic activity will recover quickly,” she said.

Other vital signs also are looking strong. The unemployment rate stands at 4.2 percent, and labor force participation has stabilized. Though wage growth remains weak by historical standards, Yellen said, that was mostly the result of slow growth in productivity.

“The pace seems broadly consistent with a tightening labor market once we account for the disappointing productivity growth in recent years,” she said.

Yellen also noted that domestic business investment has improved and stronger growth in other countries has increased demand for U.S. exports.

“I perceive that risks to global growth have receded somewhat and expect growth to continue to improve over the near term,” she said.

The most obvious cause for concern is the weakness of inflation, which has remained below the Fed’s 2 percent annual target since the financial crisis. Other developed nations are grappling with the same phenomenon.

“The apparent disconnect between strong economic activity, on the one hand, and low inflation and wages on the other, is one of the standout characteristics of the ongoing recovery, almost everywhere,” said Vitor Constancio, vice president of the European Central Bank, who spoke on the same panel as Yellen.

Some Fed officials regard weak inflation as evidence the Fed should retreat more slowly from its stimulus campaign.

Yellen reiterated Sunday that she does not agree, because she regards inflation as likely to increase as growth continued.

“My best guess is that these soft readings will not persist,” she said.

She added that she sees little evidence soft inflation in the United States is the result of a change in the global economy.