Raise likely this year: Yellen
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US Federal Reserve chair Janet Yellen has given the clearest indication yet that the Fed will raise interest rates some time before the year is out, saying inflation was starting to pick back up.
Giving a much-anticipated speech in Massachusetts this morning, Yellen outlined the state of the economy with detail – saying that inflation was heading to 2%, a figure which the Fed would be comfortable with.
“The United States has experienced very low inflation on average since the financial crisis, in part reflecting persistent economic weakness that has proven difficult to fully counter with monetary policy,” Yellen said.
She argued that the sub 2% inflation rate in the US did not give the Fed a lot of room to play with in cutting rates.
“The most important cost is that very low inflation constrains a central bank’s ability to combat recessions. Normally, the FOMC fights economic downturns by reducing the nominal federal funds rate, the rate charged by banks to lend to each other overnight,” Yellen said.
“These reductions, current and expected, stimulate spending and hiring by lowering longer-term real interest rates – that is, nominal rates adjusted for inflation –and improving financial conditions more broadly.
“But the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.”
Outlining a series of core and non-core inflationary indicators though, Yellen said that inflation was on the increase in the US – to the point where the Fed could start to think about putting rates up.
“Fortunately, prospects for the US economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential.
“My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.”
Crucially, she said the Fed would seek to increase rates before the year was out.
“Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.”