Fed chief Yellen says US still on track for more rate hikes

Federal Reserve Chair Janet Yellen (left), former Federal Reserve Chair Ben Bernanke (centre) and former Chair Paul Volcker at a panel discussion at the International House in New York on April 7, 2016.
Federal Reserve Chair Janet Yellen (left), former Federal Reserve Chair Ben Bernanke (centre) and former Chair Paul Volcker at a panel discussion at the International House in New York on April 7, 2016. PHOTO: AFP

NEW YORK (REUTERS, BLOOMBERG) - The US economy is on a solid course and still on track to warrant further interest rate hikes, Federal Reserve chair Janet Yellen said on Thursday (April 7).

Speaking at a panel with former chiefs of the US central bank, Yellen said the labour market was "close" to full strength and that inflation was currently held back by temporary factors.

Ms Yellen, who in 2014 became the first woman to lead the US central bank, discussed monetary policy and their approaches to leading the Fed with Ben Bernanke, Alan Greenspan and Paul Volcker.

The first time the four Fed chiefs have gathered for a joint public appearance comes as policy makers approach a crossroads: Tighten borrowing costs too quickly, choke off the expansion and be forced to add stimulus again, or keep rates low, run the risk of stoking inflation and overheating an economy already close to full employment.

The Fed started raising interest rates from zero in December, and has since struck a cautious tone amid increased volatility in financial markets and uncertainty about global growth. Fed policy makers debated an April rate hike at the last meeting of the Federal Open Market Committee (FOMC), with several leaning against such a move because it would signal a wrong sense of urgency and some saying it might be warranted.

Officials currently predict they'll raise rates twice this year, while investors see a less than 50 per cent chance that the Fed will tighten borrowing costs even once.

While the domestic economy is expanding, with solid gains in employment underpinning consumer spending, persistent global risks threaten to derail the recovery. Policy makers are concerned that slowing world growth could reduce corporate investment plans and restrain US exports, according to the minutes of the FOMC's March 15-16 meeting.

Mr Greenspan, reflecting on international woes he confronted while Fed chairman in the 1990s, said global developments must inevitably be taken into account by US policy makers.

"It would be foolish to believe that we can act in an isolated manner from the rest of the world," he said.

Ms Yellen, responding to criticism that the current Fed doesn't take emerging-market concerns sufficiently into account, said she and her colleagues carefully consider the impact of their actions on the rest of the world.

"We do look very carefully and try to minimize adverse spillovers where possible of our policies," she said. "One thing we can do to minimize volatility around policy changes is to communicate as clearly as we can how we're framing policy to attempt to avoid surprises."

Ms Yellen said in a March 29 speech that, given the downside risks to the global outlook and the proximity of the zero boundary on interest rates, it would be appropriate to "proceed cautiously in adjusting policy."

The minutes published on Wednesday echoed those remarks, noting the FOMC had room to raise rates if the economy turned out to be stronger than anticipated, while having less room to ease if growth softened.

"This asymmetry made it prudent to wait for additional information regarding the underlying strength of economic activity and prospects for inflation before taking another step to reduce policy accommodation," the minutes said. The FOMC holds its next meeting on April 26-27.

Central banks in Europe and Japan have resorted to negative interest rates and bond purchases to stimulate their economies and raise inflation. In China, the central bank is trying to underpin the economy as it transitions from export-driven growth to a consumer-led expansion.