Wednesday, 20 June, 2018

Yellen calls for gradual increase in interest rates

Reuters Reuters
Nellie Chapman | 27 September, 2017, 00:54

Based on a Fed analysis of inflation projections made by private and government forecasters over the past 20 years, she said, "there is a 30% probability that inflation could be greater than 3% or less than 1% next year".

Fed Chair Janet Yellen takes the mic at 12:45 p.m. ET at the annual meeting of National Association for Business Economics.

Bostic did not close the door on the need for another rate hike this year, repeating, as have several of his colleagues, that he is keeping an "open mind" about a December hike hoping the inflation lull passes.

In her speech, Fed chair Yellen said moving too gradually through rate hikes would be a problem for financial stability and that it is imprudent to keep the policy on hold until inflation reaches the two per cent mark.

It is possible, Yellen said, that the Fed may have "misspecified" its models for inflation, and "misjudged" key facts such as the underlying strength of the labor market and whether inflation expectations are as stable as they seem. "Thus, without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be hard to overcome without triggering a recession".

Still, Yellen said the policymaking Federal Open Market Committee "continues to anticipate that, with gradual adjustments in the stance of monetary policy, inflation will rise and stabilize at around 2% over the medium term".

But, investors will be looking out for US data on durable goods and fed speeches from US Federal Reserve governor Lael Brainard on labour market disparities and St. Louis Fed President James Bullard on the economy and policy.

Inflation, which was nearing the 2 percent goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4 percent. While the Fed has met its goal on employment, with the jobless rate at 4.4 percent, near a 16-year low, it has continued to miss its inflation target. So far, they have increased their benchmark lending rate twice, in March and June, leaving it at a still-low range of 1 percent to 1.25 percent.

But she said the reduction in the holdings wouldn't likely raise rates by as much as a percentage point given that the Fed meant to keep the size of its balance sheet significantly higher than it was before the financial crisis.

Yellen's term as chair is up at the beginning of February.