Fed Chief Yellen Expects Three Rate Hikes Annually Through 2019

Yellen FBN

The Federal Reserve expects to raise rates three times a year for the next two years as the U.S. economy continues to recover from the worst financial crisis since the Great Depression, moving closer to full employment and 2% inflation, Federal Reserve Chief Janet Yellen said on Wednesday.

Yellen’s remarks came during a speech in San Francisco to The Commonwealth Club outlining the goals of monetary policy and the ways in which the central bank achieves them. In her roadmap, Yellen highlighted the progress the economy has made under hers and former Fed Chief Ben Bernanke’s leadership: The creation of about 15.5 million new jobs, slowly rising inflation levels, and a modest overall economic growth rate.

“We expect – along with a very large caveat – that our interest rate expectations will change as our outlook for the economy changes,” she said. “[We are] expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3%."

The neutral rate Yellen referred to helps keep the economy steady: Preventing growth from shifting growth into a too-low gear and from expanding too quickly. The Fed raised rates by 0.25% at its last meeting in December, a year after hiking rates for the first time in nearly a decade in 2015.

Right now, the Fed continues to provide so-called easy monetary policy with short-term interest rates sitting between 0.5% and 0.75%.

"Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road -- either too much inflation, financial instability, or both."

- Fed Chief Janet Yellen

Members of the policy-setting Federal Open Market Committee have said they will rely on forthcoming economic data to signal when to raise rates again. Data from the Fed’s anecdotal Beige Book report, and various government data reports, indicated healthy levels of consumer spending and retail sales alongside a pickup in manufacturing activity, a tighter labor market, and higher wages throughout the last two months of 2016.

Wall Street predicts just a 4% chance of a rate hike at the Fed’s January 31 – February 1 meeting, according to fed funds futures, a tool used to predict changes in monetary policy. The Fed raised rates by 0.25% at its last meeting in December, a year after hiking rates for the first time in nearly a decade in 2015.

In her speech, though, Yellen said while rates are expected to move higher in the coming years, inflation is still running below the Fed’s objective, and by some measures, there’s room left for improvement in the labor market.

“Wage growth has only recently begun to pick up and remains fairly low. A broader measure of unemployment isn’t quite back to its pre-recession level,” she said while also warning that waiting too long to raise rates could provide a “nasty surprise down the road” with either too much inflation, financial instability, or both.

“In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession,” she said.

Minutes from the Fed’s December meeting showed policymakers were concerned they might have to raise rates more quickly than expected under President-elect Donald Trump’s administration due to campaign promises he made to lower taxes, relaxe regulation, and increase fiscal spending. In her speech Wednesday, Yellen said no matter what happens economically or politically, the Fed remains insulated from “short-term political pressures.”

“I promise you, with the sometimes imperfect information and evidence we have available, we will do just that by making the best decisions we can, as objectively as we can,” she said.