Yellen Signals Confidence in Economy Ahead of Fed Meeting
Yellen Signals Confidence in Economy Ahead of Fed Meeting
Janet Yellen. Photographer: Andrew Harrer/Bloomberg
- Fed chair says conditions have met expectations since October
- Waiting too long for liftoff risks disruptive tightening
Federal
Reserve Chair Janet Yellen said she’s confident in the outlook for
economic growth and warned that waiting too long to end the era of
near-zero interest rates could force the central bank to tighten too
quickly, which would risk disrupting financial markets and the six-year
expansion.
“Were the FOMC to delay the start of policy
normalization for too long, we would likely end up having to tighten
policy relatively abruptly to keep the economy from significantly
overshooting both of our goals,” Yellen told the Economic Club of
Washington on Wednesday, according to a text of her prepared remarks.
“Such an abrupt tightening would risk disrupting financial markets and
perhaps even inadvertently push the economy into recession.”
The
policy-setting Federal Open Market Committee meets in Washington Dec.
15-16 and is widely expected to raise interest rates, which have been
held near zero since 2008. Fed officials have been trying to gauge
whether the economy is headed toward their goals and can sustain growth
as rates increase.
Continuing Improvement
“On
balance, economic and financial information received since our October
meeting has been consistent with our expectations of continued
improvement in the labor market,” Yellen said Wednesday. “And, as I have
noted, continuing improvement in the labor market helps strengthen
confidence that inflation will move back to our 2 percent objective over
the medium term.”
Yellen emphasized that policy makers will
receive a range of data on the labor market, inflation and economic
activity between now and the December meeting that will influence their
decision. Still, she pointed to recent improvements in the labor market
and wages as positive signs.
“We have seen a welcome pickup in the
growth rate of average hourly earnings for all employees and of
compensation per hour in the business sector,” she said. “While it is
too soon to conclude whether these more rapid rates of increase will
continue, a sustained pickup would likely signal a diminution of labor
market slack.”
Stronger Jobs
U.S. employers added 271,000
jobs in October, the most this year, and unemployment has dipped to 5
percent, half of its 2009 peak. The Labor Department’s gauge of average
hourly earnings has shown early signs of picking up, with 2.5 percent
year-over-year growth in October, the highest since 2009. The final
employment report before the December meeting is scheduled for release
on Friday in Washington.
Even
so, inflation remains subdued, and the Fed’s preferred gauge hasn’t hit
its 2 percent goal since 2012. Yellen signaled confidence that price
pressures may be moving up, referencing core inflation rather than the
headline index the Fed prefers.
"It appears that the underlying
rate of inflation in the United States has been running in the vicinity
of 1-1/2 to 1-3/4 percent,” Yellen said, once the core data are adjusted
for downward pressure from low oil prices and a stronger dollar. She
noted that policy makers are paying close attention to indicators of
inflation expectations, some of which have shown deterioration recently.
The
initial rate liftoff is expected to be small, just 25 basis points, and
Fed speakers including Yellen have emphasized that the pace of
tightening going forward is more important than the timing.
Yellen will have another chance to elaborate on her outlook in testimony Thursday before Congress’s Joint Economic Committee.
"The
Committee anticipates that even after employment and inflation are near
mandate-consistent levels, economic conditions may, for some time,
warrant keeping the target federal funds rate below levels the Committee
views as normal in the longer run," Yellen said Wednesday.
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