Federal Reserve

Federal Reserve’s former chair Janet Yellen expects three to four US rate increases over the next year

  • Former Federal Reserve chair Janet Yellen predicted that the US central bank would continue its rate hike pace next year as the US economy is performing ‘exceptionally well’
  • Yellen sees three to four rate increases over the next year
PUBLISHED : Tuesday, 13 November, 2018, 3:26pm
UPDATED : Tuesday, 13 November, 2018, 10:56pm

The US Federal Reserve will continue the current pace of normalising its monetary policy because the American economy is doing “exceptionally well,” though this will create a tougher economic environment for emerging markets including China, its former chair said on Tuesday.

“Normalisation of both short rates and the balance sheet are proceeding smoothly and, with the economy performing so well, Chair Powell and the [Federal Open Market Committee (FOMC)] are continuing the process of removing monetary accommodation to return the federal funds rate to a neutral stance,” Janet Yellen said via video during Caijing magazine’s annual conference in Beijing, adding that she expected rates to rise by three to four times over the next year. “I expect that to continue over the next year unless there are significant economic surprises.”

The US Fed is scheduled to next meet on December 20, so Yellen’s comment implies a rate increase then, followed by up to three increases in 2019.

Her comments came as Beijing is scrambling to deal with a variety of tough issues, including the unprecedented trade war with Washington, a decade-low economic growth rate, the eroding confidence of private sector and market investors, and the resurfacing of capital outflow and yuan depreciation pressure.

How Hong Kong let the air out of property bubble without popping it

The top Chinese leadership switched its policy focus to stabilising economic growth in July, including an easing monetary policy that is shrinking the gap between US and China interest rates.

The People’s Bank of China (PBOC), for instance, has cut its required reserve ratio - the amount of money that banks are required to hold at the central bank - four times so far this year, trying to maintain market liquidity.

The Chinese central bank also implemented a series of measures to increase loans and reduce the financing cost of smaller, private-sector firms that are struggling with slower growth and rising costs.

“Now the PBOC is on the way of easing monetary policy somewhat,” Yellen said, noting the Chinese central bank “is trying to resist the equation of [yuan} appreciation.”

The Chinese government has also tightened its control of the capital account and reintroduced the counter-cyclical factor in calculating the daily midpoint of the yuan’s trading range, to curb the Chinese currency’s decline.

The midpoint of yuan was weakened by 196 pips to 6.9629 on Tuesday, re-approaching the psychologically important mark of 7 to the US dollar.

The Fed takes account of US domestic demand, not global demand, in making its rate decisions, Yellen said. However, if international factors influence US domestic demand, then it would affect the Fed’s thinking.

The outlook for further Fed rate hikes is supported by the American economy, which is performing “exceptionally well,” Yellen said, citing a 50-year low unemployment rate of 3.7 per cent, and inflation settling near the Fed’s target of 2 per cent.

Opinion: Which is scarier, Powell’s rising interest rates or Trump’s trade war?

The former Fed chair warned capital flows out of emerging markets are “simply inevitable,” with those countries with “weaker macro fundamentals” coming under the most pressure.

The currencies of countries like Argentina and Turkey have been under significant stress because of the appreciation of the dollar due to the Fed’s rate hikes and a stronger US economy supported by a corporate tax cut and government spending stimulus.

Yellen attributed the weaker yuan to a combination of domestic and international factors.

While tighter US monetary policy has pushed up the dollar relative to most currencies, including the yuan, “China is also suffering from something like a [growth] slowdown, not only due to trade, but also … a slowdown in infrastructure spending,” she said.

The Chinese central bank’s policy easing is “placing downward pressure on the currency and has triggered capital outflows,” she said.

Despite its recent strong performance, Yellen estimated that the potential longer-term US growth rate without generating inflation is still around 2 per cent.

Yellen also warned that the impact of the ongoing trade war between China and the US is a threat to global economic growth.

“I’m concerned about trade relations. Frankly, I consider it to be a lose-lose situation,” Yellen said. “Hopefully, we will be able to find ways to work through it.”

Yellen said that the trade practises of China and other countries are not the reason for the large US trade deficit. Instead, the trade gap is largely due to the fact that Americans spend more than they produce.