Federal Reserve Chairwoman Janet Yellen on Thursday reiterated that an increase in short-term interest rates “could well become appropriate relatively soon,” and offered no new signals about what the central bank will do at its meeting next month.
Officials decided to hold off on raising rates at their last meeting after judging that there was “somewhat more room” for the labor market to improve than officials had anticipated at the beginning of the year, Ms. Yellen said in prepared testimony she will deliver at a hearing on Capitol Hill Thursday morning. But she emphasized that policy must remain forward-looking.
“Were the FOMC [Federal Open Market Committee] 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,” Ms. Yellen told the Joint Economic Committee in her prepared remarks. “Moreover, holding the federal-funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
Ms. Yellen didn’t make any comments about the results of the presidential election.
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%. Policy makers have signaled in recent weeks that they are closer to lifting rates again amid steady job growth, accelerating wage gains and signs of firming inflation. Fed officials will next meet on Dec. 13-14.
Ms. Yellen will begin testifying before the committee at 10 a.m. ET.
The Fed chief said officials’ decision to leave rates unchanged last month “does not reflect a lack of confidence in the economy.”
The pace of wage gains has stepped up recently, economic growth appears to have picked up from its subdued pace earlier in the year and consumer spending has continued to post moderate gains, Ms. Yellen said.
Average job growth so far this year is still well above estimates of the pace necessary to absorb new entrants into the labor force, she said. The labor-force participation rate has also held steady this year, reflecting that the economy has had “more room to run” than officials had anticipated, she said.
“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,” she said, noting that the unemployment rate is still above where officials see it settling in the long run.
Further employment gains could help push the participation rate up further and help boost wages, she said. Ms. Yellen also 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 moderately accommodative, 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 November meeting. In their last policy statement, officials said they needed only “some” further evidence that the economy is improving before raising rates again, suggesting that the bar for moving has been lowered.
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. Americans also 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, the Commerce Department said Tuesday.
“Absent significant negative economic news over the next month, the market’s assessment of the likelihood of tightening in December seems plausible,” Boston Fed President Eric Rosengren said in a speech in Portland, Maine, on Tuesday.
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 Donald Trump’s victory stunned 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, which could create jobs and boost economic growth. 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 a speech in London Wednesday. Mr. Bullard added that his outlook for the economy hasn’t changed since the Nov. 8 election.
Markets view the prospects for a December rate increase as increasingly likely. 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.
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.