Yellen says economy near goals, warranting gradual rate hikes

FEDERAL RESERVE CHAIR JANET YELLEN said in a speech Wednesday that with the U.S. economy "close" to the central bank's inflation and employment goals, interest rates are likely to increase consistently, if gradually, in the coming years. / BLOOMBERG NEWS FILE PHOTO/ANDREW HARRER
FEDERAL RESERVE CHAIR JANET YELLEN said in a speech Wednesday that with the U.S. economy "close" to the central bank's inflation and employment goals, interest rates are likely to increase consistently, if gradually, in the coming years. / BLOOMBERG NEWS FILE PHOTO/ANDREW HARRER

WASHINGTON – Federal Reserve Chair Janet Yellen said the U.S. economy is “close” to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve.

“It is fair to say the economy is near maximum employment and inflation is moving toward our goal,” Yellen said in the text of a speech Wednesday to the Commonwealth Club in San Francisco. While “it makes sense to gradually reduce the level of monetary policy support,” the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months,” she said.

Federal Open Market Committee participants estimated they would raise borrowing costs by a quarter percentage point three times this year at their meeting in December, according to their median projection. Yellen noted that “I and most of my colleagues” were expecting last month to increase the benchmark lending rate “a few times a year” through the end of 2019.

The dollar rallied while Treasuries plunged as investors absorbed her confident characterization of the U.S. economy and the outlook for further rate increases. U.S. stocks were mixed.

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Answering audience questions, the Fed chair said that stronger U.S. growth has helped firm the dollar against the currencies of key trading partners, slowing U.S. exports, and she expects that drag to continue. She said risks to financial stability in the United States were “moderate,” and the central bank is watching for new policies from the incoming administration of President-elect Donald Trump and how they might change the Fed outlook.

Speaking of growth abroad, Yellen also said that her assessment was that global uncertainties “are a little bit less worrisome than they have been in recent years.”

Central bankers raised the rate to a range of 0.5 percent to 0.75 percent last month, the first hike in a year. The move reflected “our confidence that the economy will continue to improve,” Yellen said.

Yellen’s speech comes two days before the presidential inauguration of Donald J. Trump. His incoming team wants to boost growth through tax cuts, infrastructure investment and regulatory changes that they say could lift GDP gains to 3 percent to 4 percent a year. That compares with an average of about 2 percent since the last recession ended in mid-2009.

Yellen made no such assertion but did say the Fed will closely follow what happens with economic policy and “we will factor those into the outlook and take account of their impact on what we need to do to achieve our dual mandate objectives.”

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