Yellen says case for rate hike ‘has strengthened’
Federal Reserve Chair Janet Yellen on Friday told the world what it already knew: An interest rate hike will happen. When exactly that move is coming remains uncertain.
At the Fed’s annual symposium in Jackson Hole, Wyo., Yellen said the case for a rate hike “has strengthened in recent months” in light of recent strong job growth, but she gave no signal Fed policymakers will make a move at a meeting next month.
Yellen said the Fed’s policymaking committee “continues to anticipate that gradual increases in the federal funds rate will be appropriate over time” to meet the Fed’s goals for inflation and employment.
The markets were satisfied by the lack of surprises in Yellen’s remarks, said Tim Drilling, regional investment director of U.S. Bank’s Private Client Reserve. “It was completely in line with most expectations,” he said. “The takeaway is nothing’s changed.”
Meanwhile, Fed Vice Chairman Stanley Fischer said on CNBC that next Friday’s report on August job gains could factor into the Fed’s decision at its Sept. 20-21 meeting, a remark that appeared to keep a rate increase on the table.
The Dow Jones industrial average initially rose after Yellen spoke, but logged a small decline later as the market digested Fischer’s remarks. The index closed down 53 points to 18,395.
The Fed raised its benchmark interest rate in December for the first time in nine years but has stood pat since, leaving it at a historically low 0.4%.
In earlier statements, Yellen had said a rate increase would be likely “in coming months,” but that timetable has been removed from recent Fed communications. Although job growth bounced back strongly in June and July, averaging 273,000 after a spring slump, economic growth has been weak for three consecutive quarters, inflation remains stubbornly below the Fed’s annual 2% target and the United Kingdom’s Brexit vote amplified weak global economy concerns.
Still, Yellen added, “I believe the case for an increase in the federal funds rate has strengthened in recent months.” The remark appears to at least leave the door open to a September rate increase if next week’s employment report shows strong payroll gains again in August. Markets, however, say the odds are low that the Fed will act next month, and many economists say a move is more likely after the presidential election in November.
Yellen devoted most of her speech to the broader concern of how the Fed could respond to another recession with limited ability to cut a benchmark interest rate that is still just slightly above zero and is expected to remain at about 3% longer term in light of persistent headwinds to growth. Those include weak productivity gains in advanced economies, slower growth in working age populations and sluggish business capital spending.
Yellen noted that a recent research paper concluded bond purchases similar to those the Fed made in the years after the 2008 financial crisis — combined with cutting the key rate to near zero and assurances the Fed will keep it low — would be adequate to respond to a downturn. In fact, the paper said such an approach would be at least as effective as cutting the federal funds rate below zero — a step central banks abroad have taken but the Fed is hesitant to make because it could disrupt money market funds.