Fed’s Yellen Sees Possible December Rate Hike

Janet Yellen Testifies Before House Financial Services Committee
WASHINGTON — Federal Reserve Chair Janet Yellen pointed Wednesday to a possible December interest rate “liftoff” but said rates would rise only slowly from then on to nurture the U.S. economic recovery.

In her first public comments since the Fed’s meeting last week Yellen laid out what now appears the base case at the U.S. central bank — that low unemployment, continued growth and faith in a coming return of inflation means the country is ready for higher interest rates.

Her remarks pushed bond yields higher and stocks lower. They also caused investors to reset their expectations of a December rate hike above 60 percent, a sign that markets are finally taking the Fed’s language seriously after a period in which U.S. central bankers were frustrated by the gap between their own outlook and market bets about their likely course of action.

If the incoming information supports that expectation then our statement indicates that December would be a live possibility.

“What the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 percent target over the medium term,” Yellen said at a House Financial Services Committee hearing.

“If the incoming information supports that expectation then our statement indicates that December would be a live possibility.”

William Dudley, the influential president of the New York Fed and a permanent voter on policy, said later on Wednesday that he would “completely agree” with Yellen. December “is a live possibility, but we’ll see what the data shows,” he told reporters in New York.

Yellen, Dudley and the other 15 Fed policymakers now have six weeks to analyze new data, debate and decide whether at their Dec. 15-16 meeting to end the ultra-low interest rates set in response to the 2007-2009 economic crisis and recession.

Moving sooner rather than later to begin tightening policy, Yellen said, would allow the Fed to take a gradual approach to further hikes, slow enough to ensure that housing and other key markets are not disrupted by rising rates.

“Moving in a timely fashion — if the data and the outlook justify such a move — is a prudent thing to do because we will be able to move in a more gradual and measured pace,” she said.

‘Very Gradual Path’

“It’s been a long time that interest rates have been at zero, but markets and the public should be thinking about the entire path of policy rates over time. And the committee’s expectation is that that will be a very gradual path.”

As the central bank approaches the critical decision, there has been division at the highest levels over whether the time is right. Fed governor Lael Brainard has expressed among the deepest concerns about whether a weak global economy could damage the U.S. recovery, but on Wednesday struck a slightly more upbeat note.

“The improvement in the labor market has been extremely steady,” Brainard said at a conference in Germany. “There are certain aspects of the U.S. outlook that are encouraging.”

Both Brainard and Yellen emphasized that the Fed has not yet made a decision, and that incoming economic data would have to meet the central bank’s expectations of how the economy is performing.

Another top Fed official, Vice Chairman Stanley Fischer, is scheduled to speak at a forum in Washington later on Wednesday.

“At the moment what we see is a domestic economy that is pretty strong and growing at a solid pace, offset by some weakening spilling over to us from the global economy,” Yellen said. “On balance, as we said, we still see the risks to economic growth and the labor market as balanced.”

Yellen Says ‘Looking Forward’ to Day of Rate Hike

Federal Reserve YellenWASHINGTON — Federal Reserve Chair Janet Yellen said Wednesday she was “looking forward” to a U.S. interest rate rise that will be seen as a testament to the economy’s recovery from recession.

Fed policymakers are widely seen raising interest rates for the first time in almost a decade at their next meeting on Dec. 15-16, but they continue to parse data and trends carefully given the uneven nature of the U.S. recovery.

In her remarks to the Economic Club of Washington, Yellen expressed confidence in the U.S. economy, saying job growth through October suggested the labor market was healing even if not yet at full strength.

Yellen also reaffirmed her view that the drag on U.S. economic growth and inflation from weakness in the global economy and falling commodity prices would moderate next year. U.S. consumer spending was “particularly solid,” she noted.

“When the Committee begins to normalize the stance of policy, doing so will be a testament … to how far our economy has come,” she said, referring to the Fed’s policy-setting committee. “In that sense, it is a day that I expect we all are looking forward to.”

Investors are already betting the Fed will lift its benchmark federal funds rate this month from the zero to 0.25 percent range where it has been held since 2008. Economists also see a strong chance of a December rate rise.

The U.S. dollar strengthened Wednesday and stocks fell on Wall Street, after Yellen’s comments.

“I was a little surprised she sounded as hawkish as she did given we’re two days away from the non-farm payrolls report and a couple of weeks away from the Fed FOMC meeting,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

Yellen also is due to testify on the economic outlook before a joint Congressional committee on Thursday.

“Yellen gave a fairly positive assessment of the economy that would be consistent with the Fed raising rates at their December meeting,” said Vassili Serebriakov, currency strategist at BNP Paribas in New York.

As in previous speeches and public appearances, Yellen said the timing of the first U.S. rate increase in nearly a decade was not as important as the path of subsequent rises which policymakers expect will be gradual. Waiting too long to raise rates could deal an accidental blow to the economy, she warned.

“An abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” she said.

Responding to a question after her speech, she said the Fed would weigh incoming data to set the pace of hikes and that policymakers do not expect a mechanical path of rate moves. The Fed schedules policy reviews eight times a year and in the past it has often raised rates at successive meetings.

“This may turn out to be a very different cycle than past cycles,” she said.

Beige Book Sees Ongoing Expansion

In its Beige Book report of anecdotal information on business activity collected from contacts nationwide, published on Wednesday, the Fed said U.S. economic activity continued to expand at a modest pace in most regions from early-October through mid-November.

The Fed said consumer spending increased in nearly all districts. Manufacturing activity remained mixed, the Fed added, with exports continuing to fall as a result of the strong U.S. dollar, low commodity prices and weak global demand.

Lockhart and Williams Agree

Earlier Wednesday, Atlanta Fed President Dennis Lockhart said U.S. economic data would have to “drastically” alter the nation’s outlook over the next two weeks to change the “compelling” case for an initial hike in interest rates when the Federal Reserve next meets on Dec. 15-16.

The Labor Department’s monthly jobs report Friday will be a key data point, with economists expecting that as many as 200,000 additional jobs were created in November.

In a speech Wednesday in California, San Francisco Fed President John Williams agreed that the Federal Reserve should leave near-zero interest rates behind “sooner than later.”

A Reuters poll of over 80 economists taken after the October jobs data were published found a median 70 percent probability the Fed will raise rates on Dec 16. That is up from 55 percent in a poll taken the month before, although Reuters polls have been consistently predicting a December rate rise since the Fed took a pass in September.

December Rate Hike Assured, Yellen Faces Future Battles

US-ECONOMY-FINANCE-CONGRESS-YELLENWASHINGTON and PHILADELPHIA — Federal Reserve Chair Janet Yellen has the evidence of U.S. labor market health she wanted in order to raise benchmark interest rates for the first time in a decade this month, but she may have a tougher time selling further hikes.

Yellen’s arguments against potential dissenters at the Dec. 15-16 Fed policy meeting were strengthened by Labor Department data Friday that showedemployers hired 211,000 people in November while even greater numbers joined the workforce.

Federal funds futures contracts imply a 79-percent chance that the Fed will end seven years of near-zero interest rates at its December meeting and about even odds of a second rate rise by March.

Beyond that the outlook is more mixed. Interest rate futures maturing in the second half of next year are rising slightly, showing traders are wagering the Fed will manage no more than two further hikes before the end of next year.

You have an open debate between doves and hawks as to what the pace of increases should look like.

The differences among Fed policy makers were on display at a Philadelphia Federal Reserve conference Friday where Narayana Kocherlakota, in his last speech as president of the Minneapolis Fed, gave a sharp critique of a central bank that he said was too anxious to begin raising rates and thus would fail to create perhaps millions of jobs in a timely manner.

James Bullard, the more hawkish head of the St. Louis Fed, followed that presentation with one that argued it is time to raise rates and to begin shrinking the central bank’s $4.5 trillion balance sheet which was bulked up in recent years to boost the economy.

“You have an open debate between doves and hawks as to what the pace of increases should look like,” said Art Hogan, chief market strategist at Wunderlich Securities in New York, referring to the divisions within the Fed over readiness to tighten monetary policy.

The Fed has appeared gun shy on tightening policy twice already this year, in June and September. Its key policy rate has been 0-0.25 percent since the depths of the financial crisis in late 2008.

Mixed Messages

Wall Street’s top banks said Friday in a Reuters poll that they expect the central bank to maintain a slow pace of rate hikes, with the median forecast for the fed funds rate for mid-2016 about 0.75 percent and 1.125 percent for the end of the year.

The Fed’s policymakers hold very different views of where the central bank’s benchmark rate will end next year, ranging from less than zero to 3 percent, according to projections released in September that were based on their views of appropriate policy. The median outlook was for four quarter-point rises next year, while their views of the long-term normal level range from between 3 percent and 4 percent.

Worryingly for a consensus-seeking Yellen, it isn’t just traditional “doves” such as Gov. Lael Brainard who are questioning the pace of rate rises. Even some of the hawks, who would typically worry more about inflation risks than weak economic growth, are weighing a possibility that they may face a long spell of below normal economic growth and low inflation.

Bullard noted that rates have remained low in most advanced economies. If that persists it “may be leading us to an outcome with low nominal interest rates and low inflation that can last for a very long time,” he said, adding the Fed needs to be willing to pause and also to speed up its pace of tightening.

Earlier this week, Yellen said the process of rate increases could be gradual but she has yet to spell out what gradual means.

One driver for the pace of rate rises will be whether inflation picks up next year, and Friday’s data suggested workers might not be getting big enough raises for businesses to raise prices much.

Average hourly earnings rose 2.3 percent in November from a year earlier, down from 2.5 percent in October. Without more inflationary pressures, policymakers likely want to raise rates more gradually.

Friday’s jobs report also highlighted Brainard’s argument that weakness in the global economy could constrain U.S. growth more than policymakers currently expect. Manufacturing jobs, which are among the most exposed to the global economy, actually fell by 1,000 in November, the third drop in the last four months.

“While this report can help justify a rate hike in December, it can’t justify anything more than a very gradual path of rate hikes,” said Brian Jacobsen, a portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

Yellen Signals Growing Likelihood of December Rate Hike

US-ECONOMY-FINANCE-CONGRESS-YELLENWASHINGTON — Federal Reserve Chair Janet Yellen told Congress Thursday that economic conditions appear to be improving enough for policymakers to raise interest rates when they meet in two weeks — as long as there are no major shocks that undermine confidence.

Yellen said that even after the first rate hike, the Fed expects future rate increases will be at a gradual pace that will keep borrowing costs low for consumers and businesses.

In testimony before the Joint Economic Committee, Yellen warned that waiting an extended period of time to start raising rates would carry risks.

“Were the FOMC to delay the start … for too long,” she said, “we would likely end up having to tighten policy relatively abruptly to keep the economy from overshooting” the Fed’s goals for unemployment and inflation.

“Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into a recession,” Yellen said.

She also cited concerns by Fed critics that keeping rates exceptionally low for too long “could also encourage excessive risk taking and thus undermine financial stability.”

Fed policymakers meet on Dec. 15-16. The Fed’s key short-term rate has been at a record low near zero for the past seven years.

Many private economists are forecasting the first rate hike by the Federal Open Market Committee, the Fed’s policy panel, will be a modest quarter-point move, followed by four more quarter-point moves over the next year.

“Between today and the next FOMC meeting, we will receive additional data that bear on the economic outlook. These data include a range of indicators regarding the labor market, inflation and economic activity,” Yellen told the JEC. “When my colleagues and I meet, we will assess all of the available data and their implications for the economic outlook in making our decision.”

The Labor Department will release its November employment report on Friday. Analysts believe the data will be key in determining whether the Fed boosts rates this month.

Asked about the upcoming unemployment report, Yellen said the Fed will be watching for “a continued solid trend of job creation” that would indicate the economy has good momentum going forward.

Yellen repeated past comments that she believed two key factors keeping inflation below the Fed’s 2 percent target — the rise in the value of the dollar and falling oil prices — were likely to fade over time.

Strong Signal

Private economists said Yellen’s remarks over the past two days sent a strong signal that the Fed is ready to start raising interest rates at its meeting this month.

Gus Faucher, senior economist at PNC, said he was looking for a rate hike “barring much weaker data over the next couple of weeks.”

The Fed has left its target for the federal funds rate, the interest that banks charge on overnight loans, near zero since December 2008. It has used ultra-low borrowing costs as a way to stimulate economic activity and fight the worst recession since the Great Depression of the 1930s. The Fed has not raised the funds rate since June 2006.

Yellen said that the Fed currently anticipates that even after further improvements in the labor market and inflation, economic conditions are likely to warrant lower rates than normal “for some time.”

She said that a Fed move to start raising rates will be a sign of “how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

Yellen spoke shortly after the European Central Bank announced that it was cutting a key interest rate and extending its stimulus program to enhance efforts to bolster the 19 European countries that use the euro currency. This action disappointed investors, who had been looking for stronger moves.