Fed’s Yellen sees possible December rate rise, gradual hiking path

Federal Reserve Chair Janet Yellen

Reuters: Federal Reserve Chair Janet Yellen on Wednesday pointed to a possible December interest rate ‘liftoff’ but said rates would rise only slowly from then on to nurture the US economic recovery.

In her first public comments since the Fed’s meeting last week Yellen laid out what now appears the base case at the US central bank – that low unemployment, continued growth and faith in a coming return of inflation means the country is ready for higher interest rates.

Her remarks pushed bond yields higher and stocks lower. They also caused investors to reset their expectations of a December rate hike above 60%, a sign that markets are finally taking the Fed’s language seriously after a period in which US central bankers were frustrated by the gap between their own outlook and market bets about their likely course of action.

“What the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labour market and to return inflation to our 2% target over the medium term,” Yellen said at a House Financial Services Committee hearing.

“If the incoming information supports that expectation then our statement indicates that December would be a live possibility.”

William Dudley, the influential president of the New York Fed and a permanent voter on policy, said later on Wednesday that he would ‘completely agree’ with Yellen. December “is a live possibility, but we’ll see what the data shows,” he told reporters in New York.

Yellen, Dudley and the other 15 Fed policymakers now have six weeks to analyse new data, debate and decide whether at their 15-16 December meeting to end the ultra-low interest rates set in response to the 2007-2009 economic crisis and recession.

Moving sooner rather than later to begin tightening policy, Yellen said, would allow the Fed to take a gradual approach to further hikes, slow enough to ensure that housing and other key markets are not disrupted by rising rates.

“Moving in a timely fashion – if the data and the outlook justify such a move – is a prudent thing to do because we will be able to move in a more gradual and measured pace,” she said.

“It’s been a long time that interest rates have been at zero, but markets and the public should be thinking about the entire path of policy rates over time. And the committee’s expectation is that will be a very gradual path.”