US expansion widening as financial risks muted, says Janet Yellen

Yellen said she expects the Fed to continue gradually raising interest rates and trimming its balance sheet

Federal Reserve Chair Janet Yellen , in what may be her final testimony to Congress as head of the central bank, described a steadily brightening picture for the US economy while downplaying the risks of financial instability.

“The economic expansion is increasingly broad based across sectors as well as across much of the global economy,’’ Yellen said in testimony to the bicameral Joint Economic Committee on Wednesday in Washington. “I expect that, with gradual adjustments in the stance of monetary policy, the economy will continue to expand and the job market will strengthen somewhat further, supporting faster growth in wages and incomes.’’

Asked whether the Fed would raise interest rates at its meeting next month, Yellen declined to offer clues about her preference, saying only that it’s important the central bank maintain a gradual approach to tightening to prevent the economy from overheating.

Yellen repeated that she expects the Fed to continue gradually raising interest rates and trimming its balance sheet. The central bank has raised the target range for the federal funds rate four times in the past two years.

Yellen’s term as chair expires in early February, and President Donald Trump has nominated Fed Governor Jerome Powell to take her place. Powell is awaiting confirmation by the Senate. Yellen has announced she will leave the Fed once that happens.

With stocks trading at record highs, Yellen downplayed the threat of financial instability. “Although asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalised and broad measures of leverage and credit growth remain contained,” she said. A government report on Wednesday underscored how the economy is picking up steam. Gross domestic product expanded by 3.3 per cent in the third quarter, faster than an initially reported 3 per cent annualised pace, Commerce Department figures showed.

Drawing attention to the milestones of the post-crisis recovery, Yellen noted that 17 million more Americans were employed compared with eight years ago and unemployment had dropped to 4.1 per cent, down from a crisis-era peak of 10 per cent.