Fed Chair Janet Yellen made her most hawkish comments Thursday morning, signalling that interest rates were likely to rise in the near future.
The Fed Chair opened her testimony before the Joint Economic Committee in Congress detailing her expectations for the economy going forward.
“I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 percent objective over the next couple of years,” Yellen said.
The Fed fund rate has remained low for years, and economists have waited after every Fed Board meeting to see if interest rates would finally rise. Yellen told Congress Thursday morning that an increase could “appropriate relatively soon.”
Yellen realizes the risks of waiting too long to raise rates, and she warned against such delays Thursday morning.
“Were the [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,” the Fed chair 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,” Yellen explained.
She described how the current Fed monetary policy is only moderately accommodative, meaning there is wiggle room to make adjustments when needed. This flexibility serves to help mitigate the risk of any potential or unanticipated outside shocks to the economy.
“Because monetary policy is only moderately accommodative, 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,” Yellen concluded.
The Fed chairwoman is describing the federal funds rate gradually approaching what economists call a neutral monetary policy. This describes a situation where the federal funds rate–the overnight rate set on loans between banks–is at a level where it neither stimulates nor restrains economic growth. Essentially, it is a situation where the federal funds rate is a neutral actor in the economy.
Before the election, financial experts predicted markets would tank if President-elect Donald Trump secured the presidency. These doomsday predictions failed to come to fruition. Domestic and global stock markets soared for six consecutive days following the announcement of President-elect Donald Trump’s win over former Secretary of State Hillary Clinton. (RELATED: Stock Markets Rally For Sixth Consecutive Day After Trump Win)
Yellen has repeatedly called for fiscal stimulus as a way to jump start the economy. It may come as no surprise that she would meet the recent economic boom with relief.
President-elect Donald Trump heavily focused his economic agenda for the campaign on tax policy and deregulation the campaign season. If he were to keep his focus in office the same, the Fed may be thinking that they can be left alone to pursue monetary policy. (RELATED: A Comprehensive Look At President-Elect Trump’s Tax Plan)
Another reason Yellen could be making the change in monetary policy is for politics.
Trump did say in May of 2016 that when Yellen’s “time is up, I would most likely replace her because of the fact that I think it would be appropriate.” He went on to bash her later this year for creating a “false stock market,” and said she should be “ashamed of herself.”
Yellen’s term as Fed chairwoman is up in February of 2018. While Senate Republicans refused President Obama’s nominees to the Fed, the current Republican controlled Congress is likely more favorable to nominees put forth by Trump.
Adding to Yellen’s woes, is the fact that House Republicans have railed against both her and Federal Reserve policies for years. House Republicans tore into Yellen at a three-hour hearing in Feb. of 2015, saying that the Fed chairwoman used her post to advance liberal policy agendas and calling for more Congressional oversight over the central bank.
While the future for Yellen at the Fed remains unclear, investors and economists will be keeping their eyes on what the chairwoman says at the Fed’s December meeting.
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