World Economy

Yellen Says Rate Hike Coming

Inflation is still running below the Fed’s 2% target
Janet YellenJanet Yellen

Federal Reserve Chair Janet Yellen said Friday that the case for raising interest rates has strengthened in light of a solid job market and an improved outlook for the US economy and inflation. But she stopped short of offering any timetable.

Yellen sketched a generally upbeat assessment of the economy in a speech to an annual conference of central bankers in Jackson Hole, Wyoming. She pointed to steady gains in employment and strength in consumer spending, AP reported.

She also noted that while inflation is still running below the Fed’s 2% target, it’s being depressed mainly by temporary factors.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation,” Yellen said, “I believe the case for an increase (in the Fed’s benchmark borrowing rate) has strengthened in recent months.”

Still Yellen declined to hint at whether the Fed might raise rates at its next policy meeting, Sept. 20-21, or at its subsequent meetings in early November and mid-December. Instead, she stressed, as she frequently has, that the Fed’s rate decisions will depend on whether the freshest economic data continues to confirm its outlook.

“As ever,” she said, “the economic outlook is uncertain, and so monetary policy is not on a preset course.”

  Possible But Not Likely!

Economists took her remarks to mean that while a rate hike remains possible at the Fed’s September meeting, it isn’t necessarily likely.

“We think most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2% target, with a December move still appearing the most likely outcome,” said Andrew Hunter, an economist with Capital Economics.

Stanley Fischer, the Fed’s vice chairman and a close Yellen ally, said after her speech that in deciding whether to raise rates as soon as September, policymakers will assess the August jobs report next Friday to see whether employment growth maintains its solid pace of the past three months.

Fischer said it was still possible that the Fed could raise rates twice before year’s end. But he said that would depend on the strength of forthcoming economic data.

In her speech, Yellen said the Fed still believes that future rate increases, whenever they occur, will be “gradual”.

She defended the extraordinary tools the central bank has used to support the economy since the 2007-2009 Great Recession. To ease the impact of the recession, for example, she said the Fed had effectively used bond purchases to reduce long-term borrowing rates and had assured investors that short-term rates would stay low.

But to combat future downturns, she said the Fed should explore other options, too. She mentioned raising the Fed’s 2% inflation target to give it more leeway or possibly expanding the types of assets the Fed could buy beyond treasury’s and mortgage-backed securities. But she said those options would require more study.

  Stocks Fall

US stocks notched their biggest weekly declines since Brexit, after Yellen said the case for an increase in US short-term interest rates has strengthened in recent months.

The Dow Jones Industrial Average fell 53.01 points, or 0.3%, to 18395.40 on Friday after earlier rising as much as 124 points. The S&P 500 lost 3.43 points, or 0.2%, to 2169.04. The Nasdaq Composite rose 6.71 points, or 0.1%, to 5218.92.

For the week, the blue-chip index fell 0.8%, the S&P 500 lost 0.7% and the Nasdaq declined 0.4%, their largest losses since the week ended June 24, when the UK voted to leave the European Union.

It was the second consecutive week of declines for the Dow industrials and the S&P 500. The Nasdaq snapped an eight-week winning streak.

The utilities sector, which has rallied this year on expectations that rates will remain low, was the biggest decliner in the S&P 500 on Friday. The sector fell 2.1%, paring its 2016 gains to 13%.