The case for raising US interest rates has strengthened in recent months because of improvements in the labour market and expectations for moderate economic growth, Federal Reserve chair Janet Yellen said yesterday.
Ms Yellen did not indicate when the US central bank might raise rates, but her comments reinforced the view that such a move could come later this year.
The Fed has policy meetings scheduled for September, November, and December.
Speaking at the three-day international gathering of central bankers in Jackson Hole, Wyoming, Ms Yellen said the US economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.
“In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said, adding that the Fed still thinks future rate increases should be “gradual”.
The Fed raised rates in December, its first hike in nearly a decade, but it has held off further increases this year due to a global growth slowdown, market volatility, and generally tepid US inflation data.
Investors currently see an 18% probability the Fed will raise rates at its policy meeting next month and a 53% chance of an increase in December, according to CME Group’s FedWatch tool.
By failing to lay out a clear roadmap for what the Fed needs to see to raise rates, Ms Yellen’s comments will likely not convince some investors that a rate increase is imminent, in part because Fed policymakers are seen as sharply divided over whether to increase rates soon or take a more cautious approach.
Ms Yellen was speaking at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut rates to near zero and flooded banks with money.
She devoted much of her speech to outlining how the Fed may deal with future recessions now that many economists and Fed officials believe that an ageing population and other dynamics appear to be slowing US economic growth over the long term.
Because slower growth means future US interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates.
However, such a view is “exaggerated,” said Ms Yellen, because the Fed will be able to use bond purchases and forward guidance to ease conditions.
It may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.
It also emerged yesterday that US economic growth was more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending.
GDP expanded at a 1.1% annual rate, the US Commerce Department said in its second estimate of GDP.
That was slightly down from the 1.2% rate it reported last month.
The revision also reflected more imports than previously estimated.
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