WASHINGTON – Federal Reserve Chair Janet Yellen sketched a picture Thursday of an improving U.S. economy and said “the case for an increase” in interest rates has strengthened. The Fed is widely expected to raise rates when it meets in mid-December.
In prepared testimony to a congressional committee, Yellen noted that the job market has made further improvement this year and that inflation, while still below the Fed’s 2 percent target, has started to pick up.
Yellen said that delaying a hike in the policy rate, known as the federal funds rate, for too long could require the Fed to raise rates “relatively abruptly,” which would raise the risks of a recession.
“Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability,” Yellen said in her testimony to the Joint Economic Committee.
A group of reports released Thursday should provide support for Fed officials seeking to raise rates.
The government said home construction soared by 25.5 percent in October, the biggest increase in more than two decades, while the number of Americans seeking unemployment benefits, a proxy for layoffs, fell to the lowest point since 1973. In addition, consumer prices rose by 0.4 percent in October, the biggest rise since April and an indication that inflation is starting to move closer to the Fed’s target.
As she has done before, Yellen stressed that future rate hikes will likely be gradual, largely because the Fed thinks economic conditions do not require rates to go as high as the Fed has pushed them in years past. Since this economic recovery began in mid-2009, the economy has averaged growth of just 2 percent, below the 3 percent-plus rates of previous recoveries.
Fed officials think slower growth, caused in part by weak gains in worker productivity, and the absence of high inflation pressures will allow the Fed to keep its benchmark rate lower than in previous economic recoveries.
“Gradual increased in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” Yellen said.
The Fed chair’s answers later Thursday to questions from lawmakers will be scrutinized for any hints of what action the central bank will announce at its meeting in mid-December.
Yellen is also sure to be asked about President-elect Donald Trump’s plans for tax cuts and infrastructure spending – and their likely effects on government deficits. Since Trump’s election victory last week, investors have driven up long-term bond yields in anticipation that his economic proposals would increase federal debt and elevate inflation.
The president-elect’s idea to spend more to upgrade roads, bridges and airports, though, in general mirrors Yellen’s frequent point that Congress should act to supplement what the Fed has done through low rates to encourage spending and spur growth.
Trump’s election could affect Yellen’s Fed in other ways, too. The president-elect will be able to fill two vacant seats on the Fed’s seven-member board, which wields outsize power on the panel that sets rate policy. The board has, like Yellen herself, long favored a go-slow approach to rate increases. Trump’s new appointees potentially could affect that consensus.
Next month, if it the Fed raises rates as expected, it will be its first move since December of last year, when it raised its key rate from a record low near zero, where it had been for seven years. The December meeting will include a news conference by Yellen, when she will be able to explain the Fed’s action and perhaps provide guidance on how many further rate increases it foresees in 2017.
As measured by the gross domestic product, the economy grew at a 2.9 percent annual rate in the July-September quarter, the government has estimated, more than twice the rate in the April-June quarter. The unemployment rate is 4.9 percent, around the level typical of a healthy economy, down from 10 percent in 2009.
The housing market, whose meltdown triggered the 2008 financial crisis and the recession, has largely recovered, though. Still, the sharply higher bond yields that have followed Trump’s election, if they continue, would mean higher mortgage rates that could depress home purchases.
Even so, stronger economic growth and a recent uptick in inflation have bolstered the argument of Fed officials who have been pushing for a rate hike.
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