Yellen Sees Economy Ready for Rate Hike Getty Images

Yellen Sees Economy Ready for Rate Hike

Though she still sees slack in the job market, Yellen warned that waiting too long to raise rates could pose big risks to the economy and financial markets.

WASHINGTON—Federal Reserve Chair Janet Yellen said Wednesday that she expects the U.S. economy will continue to grow strongly enough to support the first interest rate increase in nine years.

Yellen made no comment on whether the Fed will raise its benchmark federal funds rate at its next meeting in two weeks.

But in a sign that she is ready for the momentous step, she warned that, after having kept the rate near zero for almost seven years, waiting too long could pose big risks to the economy and financial markets.

In a speech to the Economic Club of Washington, Yellen said she still sees slack in the jobs market and that inflation remains weak, both issues that have prevented the Fed from tightening monetary policy throughout this year.

But she believes that a sustained pace of growth over the next few years will take the jobs market toward full employment and spur an eventual uptick in prices, she said.

"I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our two percent objective," she said.

At the same time, even if those goals are not likely to be quickly attained, Yellen warned that waiting much longer to begin raising rates has its own risks.

If the Fed waits too long, she said, "we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals."

"Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession."

Long-Awaited Move

Yellen's comments immediately heightened expectations that the Federal Open Market Committee (FOMC), the Fed's policy board which she leads, will decide in its December 15-16 meeting to hike the fed funds rate.

The rate has sat at 0-0.25% since December 2008, in an extraordinary effort to bring the US economy back from the Great Recession of 2008-2009.

"Chair Yellen made it pretty clear in her speech... that she believes the conditions for action have been met," said Ian Shepherdson of Pantheon Macroeconomics.

The Fed has been planning for an increase for more than two years, and the prospects of the start of tightening US monetary policy has spurred turbulence through global financial markets.

But the FOMC has continued to hold off due to still-tepid US growth, the absence of inflationary pressures, and the global economic slowdown.

Yellen pointed to continued questions in the air that could support the FOMC holding off from an increase.

She sees a "significant" number of people who would take jobs if they were available and pay were stronger. And she pointed to the large number of people working only part time but would like full-time jobs if they were available.

She also made note of persistent low inflation despite the Fed's stimulus efforts, and the challenge from the global growth slowdown which has other major central banks loosening, rather than tightening, monetary policy.

But she reiterated that she saw the labor slack and inflation issues disappearing as the economy keeps growing.

And the risks to the US economy posed by global problems, including China's downturn, have lessened since midyear, she said.

Moreover, she said she expected an upturn in U.S. federal and state government spending would support strong growth.

Yellen stressed, though, that an initial rate hike would not automatically launch a steady series of increases. They will likely come slowly, and depend on what the economic data shows.

"The first step does not mean that we've embarked on some predetermined path," she said.

Copyright Agence France-Presse, 2015
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