Yellen says US rate hike coming, but pointedly offers no timetable
Federal Reserve Chair Janet Yellen said Friday 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 when those increases will take place.
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.
She also noted that while inflation is still running below the Fed’s 2 per cent target, it is being depressed mainly by temporary factors.
“In light of the continued solid performance of the labour 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 on September 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.”
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 per cent target with a December move still appearing the most likely outcome,” said Andrew Hunter, an economist with Capital Economics.
Yellen also said the economy is “nearing” the Fed’s goals of full employment and stable prices. The Fed chair didn’t discuss the specific timing of a rate move in her first public comments since June.
“September is certainly on the table, a possibility, and being considered,” said Laura Rosner, senior US economist at BNP Paribas in New York. “She strongly is keeping that in place. I think she’s putting the emphasis on the data and how the labour market performs, and that’s really what we should be watching.”
The Federal Open Market Committee raised its target for the federal funds rate to a range of 0.25 per cent to 0.5 per cent in December, after keeping the benchmark near zero for seven years. The FOMC’s next meeting is on September 20-21.
Despite their repeated intentions to raise the rate again, officials have skipped a hike at all five meetings this year, and futures markets have priced in about a 30 per cent chance of another increase next month, the second-to-last gathering before presidential elections in November.
A Commerce Department report released earlier Friday showed the US economy grew less than previously reported last quarter on lower government outlays and a bigger depletion of inventories, capping a sluggish first-half performance propped up mainly by consumer spending. Gross domestic product, the value of all goods and services produced, rose at a 1.1 per cent annualised rate, down from an initial estimate of 1.2 per cent, the report showed.
“If there was some doubt about whether or not rates will come up this year, there are fewer doubts today,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. “September? Let’s see how the employment data come in. If it’s another strong one, a lot of people on the FOMC will have a strong case to move.”
The US Labor Department releases the August payroll report on September 2. Analysts surveyed by Bloomberg expect employers added 185,000 jobs last month after adding 255,000 in July, and they predict the unemployment rate nudging down to 4.8 per cent.
The Fed chair’s speech comes amid a reassessment among central banks globally about future strategies for monetary policies, a topic she addressed in the second half of her remarks. Ageing populations, declining productivity and below-target inflation rates are likely to result in lower peaks in their policy interest rates. That means central banks are likely to reach the zero boundary on their policy rates faster in the next recession.
San Francisco Fed President John Williams, Yellen’s former research director when she was head of that bank, urged central banks in an essay earlier this month to “carefully reexamine” their strategies, and mentioned the possibility of raising inflation targets, among other options.
By contrast, David Reifschneider, a special adviser to Fed governors, argued in a paper that “even in the event of a fairly severe recession, asset purchases and forward guidance should be able to compensate” for the Fed’s limited scope to reduce short-term rates.
Yellen’s review of the Fed’s “toolkit” began with a spirited defence of techniques used during the financial crisis, including bond purchases and pledges to hold rates low for an extended period. She made clear the Fed should retain those new tools. Those may be needed again, she said, as the next recession may arrive before interest rates rise to levels normally seen during an economic recovery.
“We expect to have less scope for interest rate cuts than we have had historically,” she said.
Without embracing their views, Yellen acknowledged that economists, including some prominent Fed officials, have suggested the Fed consider broadening its asset purchases if that strategy is required again, and raising its inflation target. “The FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research,” she said.