Fed’s Yellen hints readiness towards rate hike in December

As global markets await Federal Reserve’s 15-16 December meeting for rate hike decision Fed Chair Janet Yellen says US economy is ready to bear rate hike for first time since 2006

Photo by: Reuters
Photo by: Reuters

Federal Reserve Chair Janet Yellen opened a Congressional committee hearing on the US economy on Thursday with an upbeat assessment of where the country stands as the Fed marches towards its first interest rate hike in a decade.

Yellen's prepared testimony to Congress' Joint Economic Committee largely repeated the case she laid out in a high-profile speech the day before: unemployment is low, growth continues at a modest pace, and she is confident inflation will return to the Fed's target over time.

Though she did not refer to the possibility of a rate hike when the Fed next holds a policy meeting on December 15-16, she said the current outlook and the flow of data since the central bank's last meeting in October are "consistent" with the rate hike criteria spelled out by US policymakers.

"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," Yellen told lawmakers.

"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 percent."

Growth adequate to spur continued job creation and confidence in a return of inflation are the benchmarks the Fed set in its policy statement for an initial "liftoff" of interest rates.

Members of Congress on the committee will quiz Yellen through the morning.

The Fed's first rate hike, expected to be 25 basis points, will start what is expected to be a slow cycle of policy tightening that may see rates remain below normal levels still for years to come.

Yellen noted that one reason not to delay a rate hike too much longer is to avoid the need for a more abrupt sequence of increases that could be more disruptive to the economy than the gradual rate path policymakers say they prefer.

The Fed's job is already challenging, given the moves by other major central banks to continue easing financial conditions, a divergence that could pose a drag on US growth by pressing up the value of the dollar beyond its current high level.