Yellen regards US economy healthy enough for rate hike
INSISTS THE FED WILL NOT MAKE A FINAL DECISION UNTIL ITS NEXT MEETING
Janet L. Yellen, the Federal Reserve chairwoman, said on Wednesday that economic conditions were ripe for the Fed to start raising its benchmark interest rate this month, a move that appears all but inevitable barring a sharp change in the economic weather.
“I think the economy is on the road to recovery,” Yellen said. “We’re doing well.”
While insisting the Fed’s policymaking committee would not make a final decision until its meeting December 15 and 16, Yellen said raising rates would be “a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.”
“It is a day that I expect we all are looking forward to,” she said.
The remarks by Yellen, before the Economic Club of Washington, and by other Fed officials in separate appearances on Wednesday, suggested that Fed officials had concluded that the economy was strong enough to keep growing with less support from the central bank.
The Fed has held short-term rates near zero for seven years, seeking to stimulate the economy by pushing lenders to take larger risks and encouraging businesses and consumers to borrow. When the Fed begins to raise interest rates, it will reduce those incentives.
The Fed will get one more big piece of economic data before its December meeting. The government today will release a preliminary estimate of November job growth.
“Short of saying ‘We’re going to hike rates in two weeks’ time,’” Yellen’s remarks “could hardly have been clearer,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Recovery
Yellen offered an upbeat assessment of economic conditions, although she emphasised that the recovery from the recession remained incomplete. She said labour markets had improved substantially, and she noted a “welcome pickup” in wage growth. A minority of Fed officials continue to express misgivings that the economy is ready for higher rates, but the focus of internal debate has shifted to the pace of subsequent increases.
Lael Brainard, a Fed governor who has emerged in recent months as a leading proponent of caution, said in a speech on Tuesday that the Fed should take a “cautious and gradual approach.” Brainard said the weakness of the global economy posed significant risks to the domestic economy.
The gap between the Fed’s policy rate and the real rate accordingly may be quite small, a reason to move slowly in increasing the benchmark rate.
Yellen acknowledged this point on Wednesday, saying it was a reason for the Fed to move carefully. But she said she expected the natural rate to rise with the economy.
The Fed has held short-term rates near zero for seven years, seeking to stimulate the economy by pushing lenders to take larger risks and encouraging businesses and consumers to borrow.