Fed Rate Rise Could Come ‘Relatively Soon’ as Data Point to Stronger Economy
Fed Chairwoman Janet Yellen testified to Congress amid some of the best government data in decades on housing, jobless claims and inflation
President-elect Donald Trump is preparing to take office amid signs the U.S. economy is growing stronger as the year ends and the Federal Reserve is nearing its next increase in short-term interest rates.
Fed Chairwoman Janet Yellen on Thursday said a rate increase could come “relatively soon,” and her remarks were followed by some of the best government data in decades on housing, jobless claims and inflation. The news bolstered expectations the Fed will lift its benchmark short-term rate at its next policy meeting on Dec. 13-14.
“The economy has made further progress this year” toward the Fed’s employment and inflation goals, Ms. Yellen said in testimony before Congress’s Joint Economic Committee.
The Fed chief said the results of the U.S. presidential election hadn’t changed officials’ view following their last policy meeting that the case for a rate increase had strengthened.
“To my mind, the evidence we’ve seen since that time remains consistent with the judgment the [Fed’s policy] committee reached in November,” she said, noting that incoming data supports their expectations for strengthening economic growth, an improving labor market and rising inflation.
U.S. housing starts and permits for new construction both rose in October, a sign residential construction is ramping up to meet steady demand. Housing starts rose 25.5% last month, the best gain in more than three decades, while permits increased 0.3%, the Commerce Department said.
The number of Americans filing for unemployment claims fell last week to the lowest level since November 1973, the Labor Department said. A measure of the number of people on unemployment rolls fell below 2 million for the first time since 2000.
Meanwhile, U.S. consumer prices increased in October from a year earlier at the fastest rate in two years, the latest sign inflation pressures in the economy are firming. The consumer-price index advanced a seasonally adjusted 0.4% from a month earlier, the Labor Department said. Excluding the volatile costs of food and energy, so-called core prices rose 0.1%.
“U.S. economic growth appears to have picked up from its subdued pace earlier this year,” Ms. Yellen said shortly before the data were released.
Ms. Yellen quashed speculation that she may step down next year following the election of Mr. Trump, who called the chairwoman “highly political” earlier this year and accused her of keeping interest rates low to try to help Democrats. Ms. Yellen has refuted such accusations.
Asked about the possibility she may leave before her four-year term as chairwoman ends on Jan. 31, 2018, Ms. Yellen said: “It is fully my intention to serve out that term.”
Lawmakers also pressed Ms. Yellen to weigh in on what Mr. Trump’s proposed fiscal policies, including infrastructure spending and new tax cuts, mean for the economy and interest rates.
Ms. Yellen said that “when there is greater clarity” about what those policies will entail, the Fed policy committee will have to factor in the effect of those plans on unemployment, growth and inflation, and adjust their outlook accordingly.
She acknowledged there have been significant market moves following the election, which she said appear to be investors anticipating that a fiscal spending package could boost inflation and lead to the Fed raising rates faster. But she cautioned that there will be a great deal of uncertainty around those plans “for some considerable time.”
“Things could turn out very differently, we understand, and we will simply watch what decisions are made and factor them into our thinking going forward,” she said.
Asked whether the possibility of fiscal stimulus next year could warrant a delay in raising rates, possibly until January, Ms. Yellen said: “I would think that the judgment the committee reached in November remains the appropriate one.”
Fed officials decided to hold off on raising interest rates at their meeting earlier this month after judging that there was “somewhat more room” for the labor market to improve than they had expected at the beginning of the year, Ms. Yellen said. The central bank still sees “scope for some further improvement,” she said.
Since their last meeting, Fed officials have also seen several other 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. Americans boosted their spending at retail stores in October, and September sales were higher than previously estimated, marking the strongest two-month stretch of sales in at least two years.
“Absent significant negative economic news over the next month, the market’s assessment of the likelihood of [a rate increase] in December seems plausible,” Boston Fed President Eric Rosengren said in Portland, Maine, on Tuesday.
Fed officials have left their benchmark federal-funds rate unchanged this year after raising it in December 2015 to a range between 0.25% and 0.50%. Traders in futures markets put the odds of a rate rise next month at 90.6% on Thursday morning before Ms. Yellen’s testimony was released, according to CME Group.
Officials held off on a rate increase in November in part because of worries about market volatility that could stem from the U.S. presidential election.
While Mr. Trump’s victory stunned many investors, stocks have largely reacted positively to the news and risen on speculation that a Trump administration could usher in new infrastructure spending and tax cuts. Bond prices, however, have fallen on expectations of higher inflation.
“A single policy rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting,” St. Louis Fed President James Bullard, a voting member of the Fed’s policy committee, said in London Wednesday. Mr. Bullard added that his outlook for the economy hasn’t changed since the Nov. 8 election.
Ms. Yellen warned that the Fed can’t hold rates too low for too long for fear it could encourage “excessive risk-taking and ultimately undermine financial stability.” If that were to happen, the central bank might have to raise rates more abruptly to prevent the economy from overheating, she said.
The decision to hold rates steady this month did “not reflect a lack of confidence in the economy,” she said. Rather, the Fed sees many encouraging signs.
Unemployment was at a low 4.9% last month. Average monthly job growth so far this year is still well above estimates of the pace necessary to absorb new entrants into the labor force, Ms. Yellen said. The share of adults in the labor force—holding or seeking jobs—has held steady this year, reflecting that the economy has had “more room to run” than officials had anticipated, she said.
Additional employment gains could help push the labor-force participation rate up further and help boost wages, she said. Ms. Yellen said she was troubled by persistent disparities in jobless rates for whites and African-American and Hispanic workers, as well as racial gaps in the median household income.
Ms. Yellen said she continues to expect the evolution of the economy will warrant only gradual increases in short-term rates over time, in part because the so-called neutral rate of interest—the rate at which the economy is operating at its full potential without overheating—appears to be quite low.
With the current fed-funds rate only slightly below the estimates of the neutral rate, monetary policy is likely just moderately stimulative, Ms. Yellen said. That means “the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal-funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” she said.
Ms. Yellen largely reiterated what officials said following their Nov. 1-2 meeting that they needed “some” further evidence that the economy is improving before raising rates again.
Some officials have continued to call for caution as the Fed weighs when to proceed with rate increases, arguing that there may still be room for the jobless rate to fall further without sparking inflation.
“We obviously don’t want to be pushing on the brakes harder than we need to in order to continue the trend of moderate growth,” Fed governor Daniel Tarullo said at The Wall Street Journal’s CEO Council event Tuesday