Federal Reserve Chair Janet Yellen signaled the U.S. central bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip and inflation inches higher.
A rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” Yellen said in the text of testimony she is scheduled to deliver Thursday in Washington before Congress’s Joint Economic Committee.
Yellen, who made no mention of the prospective policies of the incoming administration of President-elect Donald Trump, reiterated the expectation of Fed officials that future rate increases will be “gradual.” Bond prices have fallen and stocks have risen as investors anticipate that Trump’s proposals to cut taxes and boost infrastructure and defense spending will lead to faster inflation and stronger growth.
“Yellen’s testimony ignored the very real possibility of substantial fiscal stimulus next year,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note. She “does not want the Fed to become even more of a political punch bag than it is already.”
Yellen’s remarks will serve to cement expectations, barring a significant negative shock, for an increase in interest rates when the Federal Open Market Committee gathers in Washington Dec. 13-14. Pricing in federal funds futures contracts already imply a greater than 95 percent chance of a quarter-point hike.
Risks of Delay
The Fed chair warned of the risks attached to waiting too long before raising rates.
“Were the FOMC 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,” she said. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
She suggested the danger of that happening soon was low because current policy is only “moderately accommodative.”
“The risk of falling behind the curve in the near future appears limited,” she said.