Yellen reiterates Fed on track to raise rates 'before year end'

Washington (July 15)  Sounding an upbeat note, Federal Reserve Chairwoman Janet Yellen said she expects the U.S. economy to strengthen over the rest of 2015 and put the central bank on a path to raise interest rates “at some point this year.”

Yet the Fed chairwoman on Wednesday gave no hint on when or how many times the bank is likely to raise a key short-term interest rate that has been hovering near zero since 2008. The rate helps determine the cost of credit for new cars, college, mortgages, small-business loans and other means of financing for consumers and companies.

Most Fed watchers think the bank will make its first move as early as mid-September meeting.

“Her remarks are consistent with a rate hike in either September or December,” said Gus Faucher, senior economist at PNC Financial Services.

See live blog and video of Yellen on the Hill

In her twice-year testimony before Congress, Yellen was notably more optimistic compared to her last appearance in February. But she deviated little from a speech she gave last Friday in Cleveland in which she laid out her views.

Growth could even snap back more quickly than expected in the second half of the year, she said, as the effects of cheaper gasoline filter through the economy and the damage caused by a stronger dollar to U.S. exports begins to fade.

“Many households have both the wherewithal and the confidence to purchase big-ticket items.”

Janet Yellen 

“Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” she said.

She pointed to cheaper gasoline prices, higher consumer confidence and a pickup in consumer spending, particularly new cars and trucks. That suggests “many households have both the wherewithal and the confidence to purchase big-ticket items,” she said.

Although hiring has slowed from a torrid pace at the end of 2014, Yellen said the economy is still creating enough jobs to reduce the unemployment rate over time. The jobless rate was 5.3% in June.

“Other measures of job market health are also trending in the right direction,” Yellen said, while cautioning that there is “still some slack.”

For the first time, Yellen made clear reference to specific events overseas, namely Greece and China, that could “pose some risk” to the U.S. economy.

The “situation in Greece remains difficult,” she said. “And China continues to grapple with the challenges posed by high debt, weak property markets and volatile financial conditions.”

“he highlighted financial conditions in China. That’s a real wild card for the US and the global economy,” said Robin Anderson, senior economist at Principal Global Investors. “What’s going on in China is more of a risk to financial markets than what is happening in Greece.”

Nonetheless, Yellen appeared to indicate that the risks are small to the U.S.

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target,” she said.

The Fed is likely to keep interest rates low for a long time, however, until the economy is strong enough to absorb the nearly 17 million Americans who still can’t find a full-time, an unusually high number six years into an economic recovery.

A slow and shallow rise in rates, what’s more, probably won’t restrain the U.S. economy very much. Most loans are already extremely cheap, with some near record lows.

Source: MarketWatch