A strengthening labor market and outlook for inflation has bolstered the Federal Reserveâs case for raising short-term interest rates, Chairwoman Janet Yellen said in a speech in Jackson Hole, Wyo. Friday morning.
Yellenâs remarks were the main event at the three-day annual Economic Policy Symposium hosted by the Kansas City Federal Reserve. In media appearances this week, members of the policy-setting Federal Open Market Committee have made the case for hiking rates sooner rather than later than, perhaps as early as the FOMCâs next meeting in September. However, Yellen exercised a cautious tone in her speech, offering no firm indication on when she believes rates should begin to move higher.
Instead, the Fed chief said while economic growth has ânot been rapidâ and business investment has âremained soft,â the economy has expanded enough to spur improvement in the labor market, which has seen average monthly job gains of 190,000 per month over the last three months while the unemployment rate has remained steady around 5%. Inflation, meanwhile, has remained subdued under 2% thanks to low energy prices and declines in import prices.
Yellen noted the FOMC continues to expect moderate U.S. economic growth, further strengthening of the labor market, and inflation rising to 2% over the next few years.
âI believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the committeeâs outlook,â she said.
Data out Friday ahead of Yellenâs speech showed the U.S. economy grew at a more sluggish pace than previously thought in the second quarter. The second read on gross domestic product showed an annualized growth rate of 1.1%, down from 1.2%. Consumer spending during the period, meanwhile, came in at 4.4%, its fastest rate since the fourth quarter of 2014.
As she has maintained throughout 2016 amid the calls for higher rates from Wall Street, Yellen also emphasized monetary policy is not on a pre-set course, and economic data will continue to be the guiding light for the FOMCâs decision-making process in the months ahead as the central bank anticipates gradually moving rates higher.
Meanwhile, Wall Streetâs expectations for at least one interest rate increase by the end of the year stood at 50%, as indicated by federal funds futures, a tool used to predict changes in market expectations for changes in monetary policy.
Meanwhile, Wall Streetâs expectations for at least one interest rate increase by the end of the year stood at 56.9%, as indicated by federal funds futures, a tool used to predict changes in market expectations for changes in monetary policy, while September rate-hike odds stood at 24%.
âI think itâs risky for a rate increase next month given September and October are volatile months,â Matt Schreiber, president of WBI Investments, said. âIf we see a significant decline in U.S. markets, a recovery in late October, November, December could set up for an increase in rates.â
Bolstering the Fedâs Long-Term Toolkit
Given the theme of this yearâs Jackson Hole symposium of âDesigning Resilient Monetary Policy Frameworks for the Future,â much of Yellenâs speech focused on the Federal Reserveâs monetary policy toolkit, which expanded in the wake of the 2008 financial crisis to help combat a deep recession.
Despite calls in recent months for raising the Federal Reserveâs 2% inflation objective or implementing a policy framework like price-level or nominal GDP targeting, Yellen said the FOMC is ânot actively consideringâ those options, though they would be the subjects of future research.
With inflation running below the 2% target, Bruce Zessar, portfolio manager at Advisory Research Investment Management, said Yellenâs remarks around adjusting that target were the most interesting point in her speech.
âIf they raise from 2% to 2.5% or 3%, it would suggest the Fed would consider lower-for-longer rates, and using tools more in terms of asset purchases to drive inflation,â he explained. âBut she said theyâre sticking to 2%...so sheâs pushing aside speculation theyâll change the target inflation rate,â he said.
Yellen noted that the neutral interest rate, or the level that causes stable growth without inflation overheating, has probably fallen markedly in recent years. As a result, she said, the fed funds rate may only rise as much as 2% in the coming years, something that could limit the effectiveness of rate cuts at responding to economic trouble, implying that âasset purchases and forward guidance might have to be pushed to extremes to compensate,â therefore running the risk of excessive risk taking.
However, she said despite concerns, the Fed would still be able to provide âappreciable accommodationâ should the economic expansion waver in the near term.
âIn addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly,â she said.