Case for interest rate hike ‘has strengthened in recent months,’ Fed chair says

WASHINGTON – Federal Reserve Chair Janet Yellen signaled Friday that an increase in a key interest rate was on the table at the central bank’s next meeting in September but that a hike was far from a sure thing.

In her first public comments in two months, Yellen said the economy was improving to the point that policymakers soon could nudge up the benchmark federal funds rate for the first time since December.

But she didn’t give a timetable.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in prepared remarks to a central bankers conference in Jackson Hole, Wyoming.

She noted the U.S. economy continues to expand, “led by solid growth in household spending.” But at the same time, business investment has been “soft” and U.S. exports have been held back by “subdued foreign demand” and the strong dollar, Yellen said.

Still, the labor market has shown recent strength, with the U.S. creating an average of 190,000 net new jobs from May through July, she said.

“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Yellen said.

In saying the Fed expected “moderate” economic growth, “additional strengthening in the labor market” and inflation rising toward the central bank’s annual 2 percent target, Yellen appeared to be preparing financial markets for a potential rate hike after the central bank’s Sept. 20-21 meeting.

But as she continually does, Yellen warned that “the economic outlook is uncertain” and the Fed’s monetary policy was not “on a preset course.”

Chris Rupkey, chief financial economist at Mitsubishi UFG Financial Group, said Yellen’s statement “is an old-fashioned signal that they are very likely to raise rates on Sept. 21.”

Other analysts weren’t so sure.

“She was very careful to talk in broad generalities, which gives her the opportunity to keep September on the table,” said Lindsey Piegza, chief economist at brokerage firm Stifel Nicolaus & Co.

But Yellen’s comments “give her enough flexibility that if the data don’t evolve as she expects, she can clearly push that off until later in the year or 2017 as needed,” Piegza said.

A widely watched gauge by the CME Group futures exchange put the odds of a 0.25 percentage point increase in September at 24 percent after the speech. That was up from 21 percent on Thursday.

The policymaking Federal Open Market Committee held the rate at between 0.25 percent and 0.5 percent at its July meeting.

Fed Vice Chairman Stanley Fischer said Friday that Yellen’s comments were consistent with a potential rate hike in September and another one before the end of the year.

But he cautioned in a CNBC interview that the Fed’s decision would depend on incoming economic data, such as next Friday’s report on August job growth. That report “will probably weigh in our decision,” Fischer said.

Economists forecast that the economy added a solid 180,000 net new jobs last month, down from a strong 255,000 gain in July, and that the unemployment rate will tick down to 4.8 percent. Such a report could tilt Fed officials toward a rate increase.

Fed policymakers have been struggling in their attempt to push rock-bottom interest rates closer to normal as the recovery from the Great Recession matures. They’re worried that if rates don’t rise, they’ll be left without their best tool – lowering the rate – when the next economic downturn hits.

At the same time, Fed officials don’t want to raise the rate when the economy is still sluggish and potentially help trigger another downturn.

The Fed began lowering the rate from 4.5 percent in 2006 as the economy slid toward the Great Recession. The rate declined to near zero in 2008 in an unprecedented attempt to stimulate economic growth.