Fed Chair Janet Yellen: The case for another interest rate hike 'has strengthened in recent months'

Federal Reserve Chairwoman Janet L. Yellen said Friday the economy was improving and that another small increase in a key interest rate was nearing.

Her first public comments in two months signaled to financial markets that central bank policymakers could nudge up the benchmark federal funds rate as soon as next month.

"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,” Yellen said in prepared remarks to a central bankers conference in Jackson Hole, Wyo. 

She noted the U.S. economy continues to expand, “led by solid growth in household spending.” But at the same time, business investment has been “soft” and U.S. exports have been held back by “subdued foreign demand” and the strong dollar, Yellen said.

Still, the labor market has shown recent strength, with the U.S. creating an average of 190,000 net new jobs from May through July, she said.

“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Yellen said.

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In saying the Fed expected “moderate” economic growth, “additional strengthening in the labor market” and inflation rising toward the central bank’s annual 2% target, Yellen appeared to be preparing financial markets for a potential September rate hike. 

But as she continually does, Yellen warned that “the economic outlook is uncertain” and the Fed’s monetary policy was not “on a preset course.”

Fed policymakers have been struggling in their attempt to push rock-bottom interest rates closer to normal as the recovery from the Great Recession matures. They’re worried that if rates don’t rise they’ll be left without their best tool — lowering the rate — when the next economic downturn hits.

At the same time, Fed officials don’t want to raise the rate when the economy is still sluggish and potentially help trigger another downturn.

The Fed began lowering the rate from 4.5% in 2006 as the economy slid toward the Great Recession. The rate declined to near zero in 2008 in an unprecedented attempt to stimulate economic growth.

The Fed funds rate remained there for seven years before the central bank nudged it up a quarter of a percentage point in December. At the time, Fed policymakers estimated four similar hikes this year.

But financial market turmoil in January triggered by fears of a global economic slowdown led the Fed to hold off on another rate hike through the winter and early spring.

The Fed appeared to be nearing another hike in June, but held off because of a weak U.S. jobs report and worries about the possible impact on financial markets of the then-pending British vote on whether to leave the European Union.

When Fed policymakers met in July, most of those fears had been eased as strong job growth returned and financial markets weathered the “Brexit” vote.

The Fed’s monetary policy statement in July contained upbeat language that appeared to open the door to a rate hike as early as its next meeting in September.

Minutes of the meeting released three weeks later showed that some policymakers indicated they were ready for another small rate hike, while other officials wanted to wait until incoming data “provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand.”

Although job growth has been solid this summer, the overall economy was sluggish the first half of the year. On Friday, the Commerce Department economic growth in the second quarter of the year was a bit slower than earlier estimated.

The economy expanded at a 1.1% annual rate from April through June, a slight downward revision from the initial estimate of 1.2%. Growth in the first quarter was just a 0.8% annual rate, the slowest in two years.

Growth is expected to have rebounded this summer, with the Federal Reserve Bank of Atlanta’s closely watched estimate forecasting the economy is expanding at a 3.4% rate in the third quarter.

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Source:   latimes
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