Yellen signals likely rate hike in middle of March

Ms Janet Yellen said at a luncheon at The Executives' Club of Chicago that she had not referenced the economic impact of an expansionary fiscal policy in discussing the outlook for interest rates.
Ms Janet Yellen said at a luncheon at The Executives' Club of Chicago that she had not referenced the economic impact of an expansionary fiscal policy in discussing the outlook for interest rates.PHOTO: AGENCE FRANCE-PRESSE

The Fed also expects to raise interest rates twice more this year, to bring the benchmark closer to a 'neutral level'

NEW YORK • The US Federal Reserve is poised to raise its benchmark interest rate in the middle of the month, significantly sooner than investors had expected, as it moves to keep pace with a wave of economic optimism that started with the election of President Donald Trump.

In an unusually clear statement about a pending decision, the Fed chairman, Ms Janet Yellen, all but declared that the Federal Open Market Committee would increase rates for the first time this year at its March 14 to 15 meeting, saying that such a move "would likely be appropriate" if the economy stays on its current track.

She also suggested that would not be the last increase this year.

Policymakers pencilled in three quarter percentage-point rate increases for this year, according to the median projection in forecasts released in December.

In an indication that she thinks it is possible the Fed may have to raise rates more than that, Ms Yellen subtly altered her assessment of the current stance of monetary policy, calling it "moderately accommodative".

That contrasts with the "modestly accommodative" description she used in her Jan 19 speech in Stanford, California.

She added that the Fed still expected to raise rates twice more later in the year, which she said would bring the benchmark rate close to a level that the Fed regards as neutral, with low rates no longer providing an inducement for borrowing and risk-taking.

That outlook signals that an end is finally in sight for the Fed's economic stimulus campaign, devised during the depths of the financial crisis more than eight years ago.

The impending rate increase could heighten tensions with the White House, which wants to stimulate growth by cutting taxes, reducing regulation and increasing defence and infrastructure spending.

In the question-and-answer period after the speech, Ms Yellen went out of her way to say that she had not referenced the economic impact of an expansionary fiscal policy in discussing the outlook for interest rates.

"There's nothing that I said that would be a response to possible impending policy changes" agreed to by President Trump and Congress.

Fed officials have concluded the economy is growing at something close to the maximum sustainable pace, meaning faster growth should be offset by faster rate increases.

Financial markets, however, are taking the prospect of higher rates in stride. The Standard & Poor's 500 index, which is up more than 11 per cent since Election Day, ended trading on Friday mostly flat.

The broader consequences depend on the Fed's ability to raise interest rates without slowing economic growth. Its goal is to return rates to a level that neither encourages nor impedes economic activity.

Over the past century, however, most of the central bank's attempts to strike that balance have ended in economic recessions.

The US economy is in the midst of one of the longest expansions in its history, but also one of its weakest.

The economy grew by 1.6 per cent last year compared with 2.6 per cent in 2015, according to the government's most recent estimate.

NYTIMES, BLOOMBERG

A version of this article appeared in the print edition of The Sunday Times on March 05, 2017, with the headline 'Yellen signals likely rate hike in middle of March'. Print Edition | Subscribe