Advertisement

SKIP ADVERTISEMENT

Janet Yellen Says Economy Is Ripe for Fed Interest Rate Increase

Video
bars
0:00/1:19
-0:00

transcript

Yellen on Likelihood of Rate Increase

The Federal Reserve chairwoman, Janet L. Yellen, said any decision to raise interest rates would be “a testament” to the economy’s progress toward recovery.

SHOWS: WASHINGTON, DC, UNITED STATES (DECEMBER 2, 2015) // 2. (SOUNDBITE) (English) FEDERAL RESERVE CHAIRMAN JANET YELLEN SAYING: “However, we must also take into account the well-documented lags in the effects of monetary policy. Were the F.O.M.C. 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. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.” // 4. (SOUNDBITE) (English) FEDERAL RESERVE CHAIRMAN JANET YELLEN SAYING: “The economy has come a long way toward the FOMC’s objectives of maximum employment and price stability. When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

Video player loading
The Federal Reserve chairwoman, Janet L. Yellen, said any decision to raise interest rates would be “a testament” to the economy’s progress toward recovery.CreditCredit...Win Mcnamee/Getty Images

WASHINGTON — Janet L. Yellen, the Federal Reserve chairwoman, said on Wednesday that economic conditions were ripe for the Fed to start raising its benchmark interest rate this month, a move that appears all but inevitable barring a sharp change in the economic weather.

“I think the economy is on the road to recovery,” Ms. Yellen said. “We’re doing well.”

While insisting the Fed’s policy-making committee would not make a final decision until its meeting Dec. 15 and 16, Ms. Yellen said raising rates would be “a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.”

“It is a day that I expect we all are looking forward to,” she said.

The remarks by Ms. Yellen, before the Economic Club of Washington, and by other Fed officials in separate appearances on Wednesday, suggested that Fed officials had concluded that the economy was strong enough to keep growing with less support from the central bank.

The Fed has held short-term rates near zero for seven years, seeking to stimulate the economy by pushing lenders to take larger risks and encouraging businesses and consumers to borrow. When the Fed begins to raise interest rates, it will reduce those incentives.

The Fed will get one more big piece of economic data before its December meeting. The government on Friday will release a preliminary estimate of November job growth. Absent an unexpected labor market collapse, investors and analysts expect the Fed to move.

“Short of saying ‘We’re going to hike rates in two weeks’ time,’ ” Ms. Yellen’s remarks “could hardly have been clearer,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Ms. Yellen offered an upbeat assessment of economic conditions, although she emphasized that the recovery from the recession remained incomplete. She said labor markets had improved substantially, and she noted a “welcome pickup” in wage growth.

“The economy has come a long way toward the F.O.M.C.’s objectives of maximum employment and price stability,” she said, referring to the Federal Open Market Committee, the Fed’s policy-making group.

She added, “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 2 percent objective.”

The Fed painted a similar picture in greater detail in its latest beige book, a compendium of economic reports from the 12 regional reserve banks also released on Wednesday. It reported that economic activity “increased at a modest pace” across most of the country. It also noted increased wage pressures, particularly for skilled workers in fields like nursing and software development.

She noted also that some drags on the economy had subsided. The risks from foreign economic events have diminished, and Ms. Yellen said she expected that government spending would contribute to growth in the coming years. That is a significant change from the postcrisis period, when a combination of spending cuts and battles over fiscal policy weighed on the economic recovery.

Other Fed officials have joined Ms. Yellen in beating the drum.

“Absent information that drastically changes the economic picture and outlook, I feel the case for liftoff is compelling,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta and a policy bellwether, said in a speech Wednesday in Fort Lauderdale, Fla.

Mr. Lockhart said the December meeting could be “historic in character.”

John Williams, president of the Federal Reserve Bank of San Francisco and, like Mr. Lockhart, a centrist on monetary policy, offered a similar take in a speech in Portland, Ore.

“We’ve made remarkable progress and the economy is on the cusp of full health,” he said. “The next appropriate step is to raise rates. My preference is sooner rather than later.”

A minority of Fed officials continue to express misgivings that the economy is ready for higher rates, but the focus of internal debate has shifted to the pace of subsequent increases.

Lael Brainard, a Fed governor who has emerged in recent months as a leading proponent of caution, said in a speech on Tuesday that the Fed should take a “cautious and gradual approach.” Ms. Brainard said the weakness of the global economy posed significant risks to the domestic economy.

She has also emphasized that the domestic economy remains weak by historical standards.

The Fed stimulates the economy by holding interest rates below the level that would otherwise prevail, based on the demand for money. But demand remains weak, and that natural interest rate accordingly remains quite low. The gap between the Fed’s policy rate and the real rate accordingly may be quite small, a reason to move slowly in increasing the benchmark rate.

Ms. Yellen acknowledged this point on Wednesday, saying it was a reason for the Fed to move carefully. But she said she expected the natural rate to rise with the economy.

The Fed is basically ready to make a bet that the economy will continue to recover. Monetary policy exerts a gradual influence on economic conditions, so the Fed must constantly guess what happens next. And officials are increasingly convinced that the odds are on the side of higher rates.

Waiting too long, Ms. Yellen said, might “even inadvertently push the economy into recession.”

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Yellen Deems Economy Healthy Enough for Fed to Begin Raising Rates. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT