US federal interest rate 'set to rise'

WASHINGTON • US Federal Reserve chief Janet Yellen said prospects are good for further improvement in the labour market and the economy, keeping the central bank on track for an interest-rate increase this year.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target," Dr Yellen said in testimony prepared for delivery yesterday before the House Financial Services Committee in Washington, affirming the view of a central bank prepared to gradually raise rates after more than six years at a near-zero level.

Her written statement to the committee is to be followed by a hearing later in the night (early this morning Singapore time).

Dr Yellen, 68, again emphasised that the timing of the first rate rise in almost a decade is less important than the subsequent path of increases, which she said would be gradual. She said Fed forecasts for higher rates this year are projections and "not statements of intent to raise rates at any particular time".

In the first of two scheduled days of testimony before Congress, Dr Yellen repeated that the Fed will tighten policy when it sees more improvement in the labour market and is "reasonably confident" that inflation will head back towards 2 per cent in the medium term.

OVERSEAS SUPPORT FOR US ECONOMY

Growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for US economic activity.

MS JANET YELLEN, US Federal Reserve chief

Her testimony was similar to a speech she gave on July 10. She again acknowledged concerns over the situation in Greece and added China to her list of overseas risks. Still, she sounded a note of optimism, saying that "economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for US economic activity".

She added that "the US economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through".

Forecasts issued by the Federal Open Market Committee last month implied two quarter-point rate rises this year, followed by a shallower path of increases than officials predicted in March. The forecasts were included in a Monetary Policy Report released by the Fed Board along with her testimony.

The Fed is likely to make its first move in September, according to 76 per cent of 51 economists surveyed by Bloomberg recently.

Dr Yellen's testimony comes amid signs the economy is growing after a first-quarter contraction. Gross domestic product is forecast to expand at a 2.7 per cent rate in the second quarter, according to a Bloomberg survey of 75 economists.

The Fed chair took note of progress in a labour market that has generated more than 2.9 million jobs in the past 12 months. Unemployment fell last month to 5.3 per cent, its lowest in more than seven years.

Dr Yellen's testimony also included an explicit defence of the Fed's "transparency and accountability", following criticism by some lawmakers that the Fed has not released all the material Congress has requested as part of an investigation of the possible leak of information from the central bank to an economic consulting company in 2012.

Dr Yellen has said the Fed had declined to send the information because a separate Justice Department probe is ongoing.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on July 16, 2015, with the headline 'US federal interest rate 'set to rise''. Print Edition | Subscribe