US Fed chair gives strong signal interest rates will rise later this year

September 25, 2015

Washington (Sept 25)  US Federal Reserve chair Janet Yellen says she is ready to raise interest rates this year and intends to let the labour market run hot for a time to heal the lingering scars of the worst recession since the Great Depression.

Yellen placed herself squarely in the camp of those Federal Open Market Committee officials who favour raising rates in 2015.

“Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year,” she said yesterday in a speech in Massachusetts.

Yellen, 69, felt unwell due to dehydration toward the end of her long speech and briefly sought medical attention after the remarks, said Fed spokeswoman Michelle Smith. But the Fed chair was fine and able to resume her schedule, Smith said.

In her speech, Yellen laid out the rationale for gradual Fed tightening aimed at assuring that more Americans can find the jobs they want.

“She’s conceding liftoff, but defending gradualism,” said Michael Feroli, chief US economist at JP Morgan Securities in New York, who expects a December rate rise.

“This idea of trying to nurse the supply side of the economy back to health — that’s a very dovish theme.”

US central bankers left the benchmark policy rate unchanged last week amid concerns that economic and financial turmoil could slow growth and push them further away from their inflation goal. Fed officials have missed their 2 per cent inflation target for more than 3 years, partly due to slumping energy costs and a stronger dollar, which lowers import prices.

Yellen said there were still people seeking full-time work who could be pulled back into the labour force if the jobless level fell further.

She noted that “may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilising at 2 per cent.”

Diane Swonk, chief economist at Mesirow Financial in Chicago, said: “She wants to get to where we are recouping what we lost” in the recession.

“She knows as well as anyone what long expansions with a little overshooting can do to living standards.” Yellen expressed confidence that a significant portion of the inflation undershoot will wash out with time as the effects of energy and import prices fade, while warning that “a persistent failure to keep inflation” from falling too low or rising too high could tamper with the hard-won stability of public expectations about prices.

Taking a line from the Fed statement last week, the Fed chair said she needed to see three things to be “reasonably confident” that inflation will return to 2 per cent “over the next few years” and begin hiking rates this year — solid economic growth, long-term inflation expectations remaining near their levels from before the recession, and “further gains in resource utilisation”, which means in part lower rates of unemployment.

Yellen didn’t describe her own forecast for the benchmark lending rate next year. She did, however, lay out a programme to push the labour market to even lower rates of unemployment to pull more people back into jobs, and perhaps even prompt employers to hire more full-time workers.

“Further improvement in labour market conditions would be welcome because we are probably not yet all the way back to full employment,” the Fed chair said.

The estimated full employment rate is at 4.9 per cent, only slightly below the 5.1 per cent rate in August.

“Attracting discouraged workers back into the labour force may require a period of especially plentiful employment opportunities and strong hiring,” Yellen said.

“Firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions.”

A hot labour market might help reverse some of the “significant” damage to people’s participation in the labour force, she said, “thereby improving Americans’ standard of living”.

Those comments may begin to form what investors have been seeking for weeks — some kind of described strategy to get inflation higher through lower unemployment rates.

“She wants to explore the fringe of how low unemployment can go to bring back some of that participation in the labour force,” said Laura Rosner, US economist at BNP Paribas in New York. “This was a strategy speech. She supports a more prudent approach of starting earlier and going slower.”

Source: Bloomberg

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