Janet Yellen has strongly indicated to Congress that Federal Reserve policymakers are likely to vote to raise US interest rates in two weeks – barring any major shocks to the global economy.
The chair of the US central bank told Congress’s joint economic committee that unemployment had lowered to 5%, economic growth was continuing well and she was confident that inflation would return to the Fed’s 2% target.
“I currently judge that US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” she said on Thursday. “Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2%.”
Yellen did not specifically address the probability of the Fed increasing interest rates at its next policy meeting on 15-16 December, but she said fresh data since the policymakers’ last meeting had been “consistent” with the Fed’s rate hike criteria.
In a speech on Wednesday, Yellen said the US had “recovered substantially since the Great Recession” and she was “looking forward” to increasing rates, which have been held at near zero since the 2008 financial crisis.
Economists expect the base rate to be hiked by 25 basis points, and be the beginning of a slow cycle of policy tightening that will likely mean rates will be kept below previously normal levels for years to come. Yellen said that maintaining very low rates would encourage consumers and businesses to continue borrowing.
“With the federal funds rate near zero, we can respond more readily to upside surprises to inflation, economic growth and employment than to downside shocks,” she said. “This asymmetry suggests that it is appropriate to be more cautious in raising our target for the federal funds rate than would be the case if short-term nominal interest rates were appreciably above zero.”
She warned that any further delays to raising rates could be detrimental to the economy. “Were the FOMC [Federal Open Market Committee] 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,” she said. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.
Yellen and other members have previously indicated that a rates raise – the first since 2006 – is likely to come at the December meeting. However, she warned that any substantial changes to the global economy before then could delay the rate rise. Many had expected rates to rise in September, but such a move was nixed by concerns about the faltering Chinese economy.
Yellen said she was heartened by continued improvements in reducing the unemployment rate, which has fallen to 5% from a peak of 10% in October 2009 during the fallout of the financial crisis. US employers added 271,000 jobs in October, the most of any month so far this year, and the unemployment rate has fallen to 5%. ADP figures show private sector employers added 217,000 jobs in November – the most for five months. Government figures for November employment are due to be released on Friday.
guardian.co.uk © Guardian News and Media Limited 2010