American economy can absorb rise in rates, says Yellen

US economy is healthy enough to absorb further gradual rate increases and the slow wind down of the Fed's massive bond portfolio, said Federal Reserve Chair Janet Yellen.
National Economic Council director Gary Cohn is the leading candidate to succeed Dr Yellen (above).
National Economic Council director Gary Cohn is the leading candidate to succeed Dr Yellen (above).PHOTOS: REUTERS
National Economic Council director Gary Cohn (above) is the leading candidate to succeed Dr Yellen.
National Economic Council director Gary Cohn (above) is the leading candidate to succeed Dr Yellen.PHOTOS: REUTERS

It is on an even keel and steady enough for unwinding crisis-era stimulus: Fed chair

WASHINGTON • The United States is healthy enough to absorb further gradual rate increases and the slow wind-down of the massive bond portfolio accumulated by the Federal Reserve during the financial crisis, Fed chair Janet Yellen said in a prepared testimony delivered to Congress yesterday.

In what may be one of her last appearances on Capitol Hill, Dr Yellen depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment, and was now being supported as well by stronger economic conditions abroad.

The Fed "continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time", Dr Yellen said, while reductions in the Fed's more than US$4 trillion (S$5.5 trillion) in securities are likely to begin "this year".

Dr Yellen presented her latest economic summary to the House Committee on Financial Services, after which committee members will question her.

Her appearances before the House panel have sometimes involved sharp exchanges with lawmakers who think the Fed's influence over the economy has grown too large, and who want policymakers to be guided more closely by a mathematical rule for setting interest rates.

In a report released last week, the Fed compared its current policy with that prescribed by a variety of such rules - pointing out that the choice of a rule itself involved judgments that would lead to vastly different outcomes.

Dr Yellen referred House lawmakers specifically to that section of the report in her testimony.

By her testimony yesterday, the economy is currently on an even keel, near or beyond full employment. Interest rates are rising, and "would not have to rise all that much further" to reach what the Fed considers a neutral rate that neither encourages nor discourages spending and investment, Dr Yellen said.

The reduction in the balance sheet, which will begin slowly as the Fed reinvests only a portion of the holdings that mature each month, will mark the final exit from crisis-related policies.

Though a recent dip in inflation has been of concern among Fed officials who want to see surer progress towards the central bank's 2 per cent inflation goal, Dr Yellen ascribed it to "a few unusual reductions in certain categories of prices" that would eventually drop out of the calculation.

Dr Yellen's appearance comes as the Trump administration mulls over whether to replace her when her term ends in February next year.

US political news portal Politico reported that President Donald Trump is increasingly unlikely to nominate Dr Yellen next year for a second term.

National Economic Council director Gary Cohn is the leading candidate to succeed her.

Politico said sources in the White House, the Treasury Department and on Capitol Hill said that if Mr Cohn decides he wants the job, he is likely to get it.

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 13, 2017, with the headline 'American economy can absorb rise in rates, says Yellen'. Print Edition | Subscribe