Federal Reserve Chair Janet Yellen was clearer than ever on Friday that the central bank was poised to raise interest rates this year, as the U.S. economy was set to bounce back from an early-year slump and as headwinds at home and abroad waned.
Ms. Yellen spoke amid growing concern at the Fed about volatility in financial markets once it begins to raise rates, and a desire to begin coaxing sceptical investors towards accepting the inevitable: that a 6-1/2-year stretch of near-zero interest rates would soon end.
In a speech to a business group in Providence, Rhode Island, Ms. Yellen said she expected the world’s largest economy to strengthen after a slowdown due to ‘transitory factors’ in recent months, and noted that some of the weaknesses might be due to ‘statistical noise.’
The confident tone suggested the Fed wants to set the stage as early as possible for its first rate rise in nearly a decade, with Ms. Yellen stressing that monetary policy must get out ahead of an economy whose future looks bright.
While cautioning that such forecasting is always highly uncertain, and citing room for improvement in the labour market, the Fed chief said delaying a policy tightening until employment and inflation hit the central bank’s targets risked overheating the economy.
“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin normalising monetary policy,” Ms.Yellen told the Providence Chamber of Commerce.
In a speech in March, Ms. Yellen said only that a rate hike ‘may well be warranted later this year,’ though the Fed was at the time giving ‘serious consideration’ to making the move.
Investors globally are attempting to predict when the Fed will modestly tighten policy. Most economists point to September, while traders in futures markets held firm on December.
Ahead of a three-day U.S. holiday weekend, Treasury yields hit session highs after Ms. Yellen spoke on Friday, and short-term interest rate futures extended losses, hitting session lows. U.S. stocks were largely flat.
Ms. Yellen, however, struck some familiar dovish chords, noting that the ‘generally disappointing pace of wage growth ... suggests that the labour market has not fully healed.”
She said less progress had been made on lifting inflation, though she said the Fed believes it will rise to the central bank’s medium-term two per cent goal as oil prices rebound and other temporary factors dissipate.
“With the waning of the headwinds ... the U.S. economy seems well-positioned for growth,” Ms. Yellen said, predicting ‘moderate’ employment and output growth this year and beyond.
