Fed's Yellen signals that rate hike likely soon

Federal Reserve chief Janet Yellen on Thursday gave financial markets what they were looking for, and expecting -- a clear signal a US rate hike is likely coming in December to get ahead of inflation.

Yellen pledged to serve out her four-year term, despite accusations from  President-elect Donald Trump that she has kept interest rates low in order to help President Barack Obama.

She also issued a word of caution about the danger of political meddling in an independent central bank.

Yellen's comments to a joint congressional committee sent the dollar climbing against the yen and euro, and encouraged analysts expecting a rate increase.

"The dollar is enjoying another resurgence after somewhat of a lull yesterday, with Janet Yellen's hawkish comments further raising expectations of a December hike," said market analyst Joshua Mahony at online trading firm IG.

In her first public comments since Trump's surprise election last week over Hillary Clinton, Yellen said she will remain in her post until the end of January 2018.

"It is fully my intention to serve out that term," she told lawmakers on the Joint Economic Committee. 

Trump's attacks had prompted speculation that he might want to replace her, although the only way a president can remove a sitting Fed chair is in the case of serious misconduct.

- Rate hike 'relatively soon' -

Yellen gave the strongest indication to date that the Fed will raise interest rates at its December 13-14 policy meeting, a year after the first and only rate hike since the financial crisis.

"I do think that the economy's making very good progress toward our goals and that the judgment the committee reached in November still pertains," she said.

A rate hike will be appropriate "relatively soon," supporting the prevailing market view, she told the committee.

The Fed's policy-setting Federal Open Market Committee said at the November meeting that the case had strengthened for an increase in the federal funds rate.

The determining factor, it said, was the need for "some further evidence of continued progress toward its objectives" of two percent inflation and full employment.

Since then, Yellen said, the incoming economic data "is consistent with our expectation of strengthening growth" with an improving labor market and inflation moving up.

In the two weeks since the last FOMC meeting, the unemployment rate fell a tenth of a point to 4.9 percent and the economy added 161,000 jobs -- marking 73 consecutive months of job growth. 

Even better from the Fed's perspective, wages posted their strongest gain in seven years, and consumer prices are now up 1.6 percent for the past 12 months, and 2.1 percent excluding volatile food and energy prices.

While she stressed that rate hikes are likely to be gradual, Yellen cautioned that the Fed cannot keep rates too low for long as that would risk letting inflation get beyond the central bank's two percent target and fueling risks in financial markets.

Ian Shepherdson, chief economist of Pantheon Macroeconomics, worries the Fed is getting closer to being behind the curve, saying inflation could breach two percent in mid-2017 "just as the Trump stimulus kicks in. 

"That would leave a cautious Fed horribly exposed, and struggling to catch up," he said in a research note.

- Stimulus policies a factor -

However, in the coming months, any stimulus policies implemented by the new Trump White House and Republican-controlled Congress will factor into the Fed's decision-making process.

Economists agree Trump's pledge to implement spending and tax cuts could stimulate the economy but also run the risk of fueling inflation and increasing the deficit, which would require more debt.

Yellen said "when there's greater clarity about the economic policies that might be put into effect," the FOMC would factor them in and "perhaps adjust our outlook depending on what happens."

She cautioned that unlike the period after the financial crisis when stimulus was needed, the economy now is nearly at full employment, and with high public deficit and debt levels, "it's clearly up to Congress and the administration to weigh the costs and benefits of fiscal policies that you will be considering."

- 'Political pressure' -

In response to a question, Yellen said that political meddling in monetary policy can be disastrous.

"Sometimes central banks have to do things that are not immediately popular," she said. 

"We've seen really terrible things in countries where central banks are subject to political pressure," including hyperinflation, she added.

Source: AFP