Yellen says case for rate hike ‘ has strengthened’
Federal Reserve Chair Janet Yellen said Friday the case for an interest rate increase “has strengthened in recent months” in light of recent strong job growth, but she gave no signal Fed policymakers willmake amove at a meeting nextmonth.
At the Fed’s annual symposium in Jackson Hole, Wyo., 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 Dow Jones industrial average rose after Yellen’s remarks, but finished down 53 points as the market digested the news.
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 in June and July averaged 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 concerns about a weak global economy.
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 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 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 a recent research paper concluded bond purchases similar to those the Fed made in the years following the 2008 financial crisis— combined with cutting the key rate to near zero — 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.
The Fed’s more than $ 3 trillion in purchases of Treasury bonds and mortgagebacked securities lowered longterm interest rates, stimulating economic growth.
Yellen, however, noted this analysis may be too optimistic, in part because long- term rates are already likely to be unusually low.