Federal Reserve Chair Janet Yellen said the U.S. central bank is close to lifting interest rates as the economy continues to strengthen, and signaled her intention to remain at the helm until her term ends in January 2018.
A rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” Yellen said in the text of testimony she delivered Thursday in Washington before Congress’s Joint Economic Committee.
Yellen reiterated the expectation of Fed officials that future rate increases will be “gradual.” Bond prices have fallen and stocks have risen as investors anticipate that President-elect Donald Trump’s proposals to cut taxes and boost infrastructure and defense spending will lead to faster inflation and stronger growth.
Yellen’s remarks will serve to cement expectations, barring a significant negative shock, for an increase in interest rates when the Federal Open Market Committee gathers in Washington Dec. 13-14. Pricing in federal funds futures contracts already imply a greater than 95 percent chance of a quarter-point hike.
Asked by lawmakers about the impact of the presidential election on Fed policies, Yellen said the economy is still making progress toward the central bank’s goals, and that it’s up to Congress and the administration to weigh the costs and benefits of fiscal policies. She said she plans to serve out her full term as Fed chair, laying to rest speculation she would resign after Trump criticized her policies during his successful campaign for president.
“I was confirmed by the Senate to a four-year term, which ends at the end of January of 2018, and it is fully my intention to serve out that term,” she said.
Risks of Delay
The Fed chair warned of the risks attached to waiting too long before raising rates.
“Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals,” she said. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
She suggested the danger of that happening soon was low because current policy is only “moderately accommodative.”
“The risk of falling behind the curve in the near future appears limited,” she said.
At their most recent meeting earlier this month, Fed officials left the target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent — where it’s been since December — and said the case for raising rates had “continued to strengthen.”
“A rate hike in December is a done deal, barring a significant surprise in the next jobs numbers or in financial markets,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist. “But the pace of firming is likely to continue to be glacial because the funds rate will then be within about a percentage point of the FOMC’s estimate of neutral,” he said, referring to the level of rates that neither spurs nor slows the economy.
Yellen said the decision not to raise rates earlier this month didn’t reflect a lack of confidence on the economy.
“I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the committee’s 2 percent objective over the next couple of years,” she said. “In addition, global economic growth should firm, supported by accommodative monetary policies abroad.”
While the recent pace of jobs gains “cannot continue indefinitely,” Yellen said she still saw room for further strengthening of the labor market.
At 4.9 percent, the U.S. unemployment rate is still slightly above most Fed officials’ estimate for the lowest sustainable level of joblessness, she said. Involuntary part-time employment, she noted, remains elevated.
Yellen saw some signs that a tightening labor market was beginning to produce higher wage gains. Stepped up pay rises should eventually help boost inflation to the Fed’s goal just as temporary forces holding it down — lower prices for imports and oil — continue to fade, she said.
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