Yellen sees US economy ready for rate hike

AFP: WASHINGTON: Federal Reserve Chair Janet Yellen said on Wednesday (2 December) that she expects the US economy will continue to grow strongly enough to support the first interest rate increase in nine years.

Yellen made no comment on whether the Fed will raise its benchmark federal funds rate at its next meeting in two weeks. But in a sign that she is ready for the momentous step, she warned that, after having kept the rate near zero for almost seven years, waiting too long could pose big risks to the economy and financial markets.

In a speech to the Economic Club of Washington, Yellen said she still sees slack in the US jobs market and that inflation remains weak, both issues that have prevented the US central bank from tightening monetary policy throughout this year.

But she believes that a sustained pace of growth over the next few years will take the jobs market toward full employment and spur an eventual uptick in prices, she said.

“I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our two percent objective,” she said.

At the same time, even if those goals are not likely to be quickly attained, Yellen warned that waiting much longer to begin raising rates has its own risks.

If the Fed waits too long, she said, “we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals.” “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

Yellen’s comments immediately heightened expectations that the Federal Open Market Committee (FOMC), the Fed’s policy board which she leads, will decide in its Dec 15-16 meeting to hike the fed funds rate.