US Federal Reserve Chair Janet Yellen on Thursday indicated an increase in interest rate “relatively soon” if the American economy continues to show sign of improvement. “US economic growth appears to have picked up from its subdued pace earlier this year. After rising at an annual rate of just 1 per cent in the first half of this year, inflation-adjusted gross domestic product is estimated to have increased nearly 3 per cent in the third quarter,” Yellen said in her testimony before the Joint Congressional Economic Committee.
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The Federal Reserve, she said, expects economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 per cent objective over the next couple of years.
“This judgement reflects my view that monetary policy remains moderately accommodative and that ongoing job gains, along with low oil prices, should continue to support household purchasing power and therefore consumer spending,” she said.
“In addition, global economic growth should firm, supported by accommodative monetary policies abroad. As the labor market strengthens further and the transitory influences holding down inflation fade, I expect inflation to rise to two per cent,” Yellen said.
Commenting on the implications of recent economic developments and the economic outlook for monetary policy, Yellen said the stance of monetary policy has supported improvement in the labor market this year, along with a return of inflation toward the FOMC’s 2 per cent objective.
In September, the Federal Reserve decided to maintain the target range for the federal funds rate at 1/4 to 1/2 per cent and stated that, while the case for an increase in the target range had strengthened, it would, for the time being, wait for further evidence of continued progress toward its objectives.
“At our meeting earlier this month, the (Federal Open Market) Committee (FOMC) judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives,” Yellen said.
“This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee’s 2 per cent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced,” she said.
Yellen said the US economy has made further progress this year toward the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. Job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force.
The unemployment rate, which stood at 4.9 per cent in October, has held relatively steady since the beginning of the year, she said, adding that the stability of the unemployment rate, combined with above-trend job growth, suggests that the US economy has had a bit more “room to run” than anticipated earlier.
“This favorable outcome has been reflected in the labor force participation rate, which has been about unchanged this year, on net, despite an underlying downward trend stemming from the aging of the US population,” she said.
Yellen said the unemployment rate is still a little above the median of Federal Open Market Committee participants’ estimates of its longer-run level, and involuntary part-time employment remains elevated relative to historical norms. Further employment gains may well help support labor force participation as well as wage gains; indeed, there are some signs that the pace of wage growth has stepped up recently.
“While the improvements in the labor market over the past year have been widespread across racial and ethnic groups, it is troubling that unemployment rates for African Americans and Hispanics remain higher than for the nation overall, and that the annual income of the median African-American household and the median Hispanic household is still well below the median income of other US households,” Yellen said.