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Portfolio > Economy & Markets

Yellen Says Economy Near Goals, Warrants Gradual Rate Hikes

By Craig Torres, Bloomberg

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Federal Reserve Chair Janet Yellen said the U.S. economy is “close” to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve.

“It is fair to say the economy is near maximum employment and inflation is moving toward our goal,” Yellen said in the text of a speech Wednesday to the Commonwealth Club in San Francisco. While “it makes sense to gradually reduce the level of monetary policy support,” the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months,” she said.

Federal Open Market Committee participants estimated they would raise borrowing costs by a quarter percentage point three times this year at their meeting in December, according to their median projection. Yellen noted that “I and most of my colleagues” were expecting last month to increase the benchmark lending rate “a few times a year” through the end of 2019.

Central bankers raised the rate to a range of 0.5 percent to 0.75 percent last month, the first hike in a year. The move reflected “our confidence that the economy will continue to improve,” Yellen said.

Yellen’s speech comes two days before the presidential inauguration of Donald Trump. His incoming team wants to boost growth through tax cuts, infrastructure investment and regulatory changes that they say could lift GDP gains to 3 percent to 4 percent a year. That compares with an average of about 2 percent since the last recession ended in mid-2009.

U.S. central bankers are bracing for what could be an economic regime shift. Earlier this week, Fed Governor Lael Brainard said fiscal policies that boost demand when the economy is already around full employment and 2 percent inflation are “relatively more likely to be accompanied by increases in interest rates.”

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