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Yellen signals solid economy would lead to December rate hike

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(Bloomberg) — Fed Chair Janet Yellen said an improving economy has set the stage for a December interest-rate increase if economic reports continue to assure policy makers that inflation will accelerate over time.

“At this point, I see the U.S. economy as performing well,” Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington.

“Domestic spending has been growing at a solid pace” and if the data continue to point to growth and firmer prices, a December rate hike would be a “live possibility,” she said in response to a question from Representative Carolyn Maloney, a New York Democrat.

The Federal Open Market Committee in its October statement said it will consider raising interest rates at its “next meeting,” citing “solid” rates of household spending and business investment.

No decision has yet been made on the timing of a rate increase, Yellen cautioned.

“What the committee has been expecting is that the economy will continue to grow at a pace that’s sufficient to generate further improvements to the labor market and to return inflation to our 2 percent target over the medium term,” she said.

U.S. central bankers have held the policy rate near zero since 2008 as they have waited for labor markets to move closer to their goal of full employment.

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Jobless Rate

The unemployment rate stood at 5.1 percent in September, slightly above the 4.9 percent rate that officials estimate would satisfy their mandate. The Bureau of Labor Statistics will release the October jobs data Friday.

The Fed has missed its 2 percent inflation target for more than three years, and its Oct. 28 statement said they need to be “reasonably confident” that prices will rise toward their goal before raising rates.

“If we were to move, say in December, it would be based on an expectation, which I believe is justified, that with an improving labor market and transitory factors fading that inflation will move up to 2 percent,” Yellen said.

The economy slowed to a 1.5 percent pace in the third quarter, according to the government’s advance estimate. However, low gasoline prices, and employment and income gains are projected to sustain spending.

The pace of growth will quicken to a 2.7 percent annual rate in the final three months, according to economists surveyed by Bloomberg.

Fed officials’ last meeting of the year will be held Dec. 15-16, and it includes a press conference with Yellen and a new set of forecasts from policy makers.