August 26, 2016 — 9:00 AM PET
- In Wyoming, Fed chair says economy nearing Fed’s twin goals
- GDP growth been sufficient to boost labor market, she says
Federal Reserve Chair Janet
Yellen said the case to raise interest rates is getting stronger as the U.S.
economy approaches the central bank’s goals.
“In light of the continued solid
performance of the labor 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 in the text of a speech Friday to
central bankers and economists in Jackson Hole, Wyoming.
She also said the economy is
“nearing” the Fed’s goals of full employment and stable prices. The Fed chair
didn’t discuss the specific timing of a rate move in her first public comments
since June.
The Federal Open Market Committee
raised its target for the federal funds rate to a range of 0.25 percent to 0.5
percent in December, after keeping the benchmark near zero for seven years.
Despite their repeated intentions
to raise the rate again, officials have skipped a hike at all five meetings
this year, and futures markets have priced in about a 30 percent chance of
another hike at the Sept. 20-21 policy meeting, the second-to-last gathering
before presidential elections in November.
“While economic growth has not
been rapid, it has been sufficient to generate further improvement in the labor
market,” Yellen said at the Kansas City Fed’s annual conference, the title of
which is “Designing Resilient Monetary Policy Frameworks for the Future.”
‘Moderate Growth’
“Looking ahead, the FOMC expects moderate
growth in real gross domestic product, additional strengthening in the labor
market, and inflation rising to 2 percent over the next few years,” Yellen said
in her prepared remarks. “Based on this economic outlook, the FOMC continues to
anticipate that gradual increases in the federal funds rate will be appropriate
over time to achieve and sustain employment and inflation near our statutory
objectives.”
A Commerce Department report
released earlier Friday showed the U.S. economy grew less than previously
reported last quarter on lower government outlays and a bigger depletion of
inventories, capping a sluggish first-half performance propped up mainly by
consumer spending. Gross domestic product, the value of all goods and services
produced, rose at a 1.1 percent annualized rate, down from an initial estimate
of 1.2 percent, the report showed.
The Fed chair’s speech comes amid
a reassessment among central banks globally about future strategies for
monetary policies, a topic she addressed in the second half of her remarks.
Ageing populations, declining productivity and below-target inflation rates are
likely to result in lower peaks in their policy interest rates. That means
central banks are likely to reach the zero boundary on their policy rates faster
in the next recession.
San Francisco Fed President John
Williams, Yellen’s former research director when she was head of that bank,
urged central banks in an essay earlier this month to “carefully reexamine”
their strategies, and mentioned the possibility of raising inflation targets,
among other options. By contrast, David Reifschneider, a special adviser to Fed
governors, argued in a paper that “even in the event of a fairly severe
recession, asset purchases and forward guidance should be able to compensate”
for the Fed’s limited scope to reduce short-term rates.
Fed’s Tools
Her review of the Fed’s
"toolkit" began with a spirited defense of techniques used during the
financial crisis, including bond purchases and pledges to hold rates low for an
extended period. She made clear the Fed should retain those new tools. Those
may be needed again, she said, as the next recession may arrive before interest
rates rise to levels normally seen during an economic recovery.
“We expect to have less scope for
interest rate cuts than we have had historically,” she said.
Without embracing their views,
Yellen acknowledged that economists, including some prominent Fed officials,
have suggested the Fed consider broadening its asset purchases if that strategy
is required again, and raising its inflation target. “The FOMC is not actively
considering these additional tools and policy frameworks, although they are
important subjects for research,” she said.
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