On Thursday, in her first public remarks since Donald Trump won the presidency, Federal Reserve chairwoman Janet L. Yellen announced that the Fed would likely raise its benchmark interest rate in December.
The New York Times reported that Yellen insisted the economy was healthy in prepared testimony for Congress’s Joint Economic Committee, saying, “U.S. economic growth appears to have picked up from its subdued pace earlier this year.” Yet she also tempered that assessment, adding, “While above-trend growth of the labor force and employment cannot continue indefinitely, there nonetheless appears to be scope for some further improvement in the labor market.”
Bloomberg reported that Yellen said of the hike that it “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,”
Explaining why the Fed had not already raised rates, Yellen posited that the reluctance to do so did not derive from lack of confidence in the economy, but rather the benefit of low borrowing costs, which stimulate economic growth by eliciting borrowing and risk-taking. The Wall Street Journal took a rosy view of the economy, too, stating of the Fed’s prospective decision, “They now have several new pieces of reassuring data: wages grew 2.8% in October, the fastest annual pace since June 2009, and employers continued to add jobs at a steady clip, the Labor Department said earlier this month.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., warned, “Yellen’s testimony ignored the very real possibility of substantial fiscal stimulus next year … (Yellen) “does not want the Fed to become even more of a political punch bag than it is already.”
But Yellen gave her own worries about waiting too long:
Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
Yellen stated that low interest rates were encouraging speculation, asserting, “Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
Jonathan Wright, a former Fed economist, stated, “A rate hike in December is a done deal, barring a significant surprise in the next jobs numbers or in financial markets. But the pace of firming is likely to continue to be glacial because the funds rate will then be within about a percentage point of the FOMC’s estimate of neutral.”
The target range for the benchmark federal funds rate at 0.25% to 0.5% since December 2015.