US economy ready for rate hikes: Yellen

Economy should continue to expand over the next few years, says Fed chair

Federal Reserve Chair Janet Yellen said the US economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation.

“Considerable uncertainty always attends the economic outlook,” Yellen said Wednesday in remarks prepared for delivery to the US House Financial Services Committee. “There is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilisation.”

The S&P 500 was up 16.2 points, or 0.667895 per cent, at 2,441.73 and the Nasdaq Composite was up 56.47 points, or 0.91 per cent, at 6,249.78.

She repeats the performance on Thursday before the Senate Banking Committee, wrapping up her final testimony to Congress as Fed chair, unless she is re-nominated by President Donald Trump. Yellen’s current term expires on February 3.

Yellen emphasised in her remarks that the central bank is on alert about prices remaining below the central bank’s 2 per cent target. Other members of the Federal Open Market Committee have mentioned similar concerns in recent days.

“The committee will be monitoring inflation developments closely in the months ahead,” she said.

Nevertheless, the Fed chair said, the baseline outlook is for levels of interest rates to continue to support job gains and income growth and therefore consumer spending.

A faster pace of global growth should support US exports, she said, and a recovery in drilling activity should support business investment.

“These developments should increase resource utilisation somewhat further, thereby fostering a stronger pace of wage and price increases,” she said. 

Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors,” which she did not specify, holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.

She also mentioned that the Fed anticipates it will start reducing its balance sheet “this year.”