Yellen signals the Fed will likely raise rates this month

WASHINGTON – Federal Reserve Chair Janet Yellen signalled Friday that the Fed will likely resume raising interest rates later this month to reflect a strengthening job market and inflation edging toward the central bank’s 2 per cent target.

Yellen also said in a speech in Chicago that the Fed expects steady economic improvement to justify additional rate increases. While not specifying how many rate hikes could occur this year, Yellen noted that Fed officials in December had estimated that there would be three in 2017.

Yellen’s signal of a likely rate hike this month reflects an encouraging conclusion by the Fed: That nearly eight years after the Great Recession ended, the U.S. economy has finally regained most of its health.

At a separate appearance Friday in New York, Vice Chair Stanley Fischer added his voice to a series of Fed officials who have indicated this week that they would likely favour raising rates at the Fed’s next meeting March 14-15.

Asked whether there had been a conscious effort by Fed officials to signal a probable rate hike at that meeting, Fischer said, “If there has been a conscious effort, I’m about to join it.”

Many economists now say that barring an unexpectedly disastrous monthly jobs report next Friday, a Fed rate increase this month appears certain.

“The Fed will hike unless next week’s payroll report is calamitous,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “That’s unlikely, so we expect rates to rise.”

At the March 14-15 meeting, Yellen said the Fed’s policymakers will “evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

Friday’s remarks from Yellen and Fischer echoed those made earlier this week by several other Fed officials, including Lael Brainard, a board member who had been a leading voice urging caution in raising rates.

What has shifted the sentiment of most Fed officials decisively toward a rate increase has been a wave of robust economic data — notably on job growth, manufacturing and consumer confidence — along with surging stock prices.

On Thursday, for example, the government reported that first-time applications for unemployment benefits — a proxy for the pace of layoffs — fell last week to their lowest level in nearly 44 years.

The stock market has been setting a string of record highs, fueled by confidence that President Donald’s Trump’s plans for cutting taxes and boosting spending will win congressional approval.

And inflation, which had been lagging at chronically low levels, has been edging steadily up, reflecting in part a rebound in gasoline prices and higher wages. The Fed’s preferred inflation gauge showed that prices rose 1.9 per cent over the 12 months that ended in January. That was the largest 12-month gain in nearly five years and just below the Fed’s 2 per cent target for inflation.

Yellen was asked during a question-and-answer period about the Fed’s likely response to Trump’s forthcoming economic stimulus program, the details of which remain unclear. Yellen said Fed officials are inclined to wait to see which measures are approved by Congress.

“I think most of my colleagues have decided that we should just be patient and wait to see what happens,” Yellen said.

In December, the Fed raised its benchmark rate by a quarter-point to a range of 0.5 per cent to 0.75 per cent. It was its first increase since December 2015, when the Fed raised its key rate from a record low. In estimating three rate hikes for 2017, the Fed was indicating a quickened pace of increases.

In her speech, Yellen sought to explain why the Fed has been slow to raise rates in the past two years. She pointed to the prolonged drop in oil prices that started in 2014 and slowed spending by energy companies. And she noted a sizable rise in the value of the dollar, which depressed inflation and hurt export sales by making American goods costlier overseas.

Other disruptive events last year led the Fed to proceed cautiously. They included anemic U.S. economic growth early in the year, global fears about a sharp slowdown in China and Britain’s vote to leave the European Union.

Despite all that, Yellen said, “The U.S. economy has exhibited remarkable resilience in the face of adverse shocks.”

She said she saw no evidence to suggest that the Fed has been excessively slow to raise rates or that inflation is threatening to rise too quickly.

“I therefore continue to have confidence that a gradual removal of accommodation is likely to be appropriate,” Yellen said.

At the same time, she added: “Unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”

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AP staff writer Sara Burnett in Chicago contributed to this report.