Chance of US rate hike ‘strengthens’, according to US Federal Reserve chair Janet Yellen

US FEDERAL Reserve Chair Janet Yellen has given her strongest indication yet that interest rates will rise in December.

US FEDERAL Reserve Chair Janet Yellen has sketched a picture of an improving economy and said “the case for an increase” in interest rates has strengthened. The Fed is widely expected to raise rates when it meets in mid-December.

In prepared testimony to a congressional committee, Ms Yellen noted that the job market has made further improvement this year and that inflation, while still below the Fed’s 2 per cent target, has started to pick up.

Ms Yellen said that delaying a hike in the policy rate, known as the federal funds rate, for too long could require the Fed to raise rates “relatively abruptly,” which would raise the risks of a recession.

“Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability,” Ms Yellen said in her testimony to the Joint Economic Committee.

Donald Trump has been critical of Federal Reserve Board Chair Janet Yellen (L), saying she is creating a false economy by keeping interest rates low. Picture: AFP

The government said home construction soared by 25.5 per cent in October, the biggest increase in more than two decades, while the number of Americans seeking unemployment benefits, a proxy for lay-offs, fell to the lowest point since 1973. In addition, consumer prices rose by 0.4 per cent in October, the biggest rise since April and an indication that inflation is starting to move closer to the Fed’s target.

As she has done before, Ms Yellen stressed that future rate hikes will likely be gradual, largely because the Fed thinks economic conditions do not require rates to go as high as the Fed has pushed them in years past.

Since this economic recovery began in mid-2009, the economy has averaged growth of just 2 per cent, below the 3 per cent-plus rates of previous recoveries.

Fed officials think slower growth, caused in part by weak gains in worker productivity, and the absence of high inflation pressures will allow the Fed to keep its benchmark rate lower than in previous economic recoveries.

“Gradual increased in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” Ms Yellen said.

The US Federal Reserve building in Washington, DC. Picture: AFP

Since Mr Trump’s election victory last week, investors have driven up long-term bond yields in anticipation that his economic proposals would increase federal debt and elevate inflation.

The president-elect’s idea to spend more to upgrade roads, bridges and airports, though, in general mirrors Ms Yellen’s frequent point that Congress should act to supplement what the Fed has done through low rates to encourage spending and spur growth.

Mr Trump’s election could affect Ms Yellen’s Fed in other ways, too. The president-elect will be able to fill two vacant seats on the Fed’s seven-member board, which wields power on the panel that sets rate policy. The board has, like Ms Yellen herself, long favoured a go-slow approach to rate increases. Mr Trump’s new appointees potentially could affect that consensus.

Next month, if it the Fed raises rates as expected, it will be its first move since December of last year, when it raised its key rate from a record low near zero, where it had been for seven years. The December meeting will include a news conference by Ms Yellen, when she will be able to explain the Fed’s action and perhaps provide guidance on how many further rate increases it foresees in 2017.

The housing market, whose meltdown triggered the 2008 financial crisis and the recession, has largely recovered. Still, the sharply higher bond yields that have followed Mr Trump’s election, if they continue, would mean higher mortgage rates that could depress home purchases.

Even so, stronger economic growth and a recent uptick in inflation have bolstered the argument of Fed officials who have been pushing for a rate hike.

Originally published as Chance of US rate hike ‘strengthens’, according to US Federal Reserve chair Janet Yellen