CHICAGO”•Federal Reserve Chair Janet Yellen signaled Friday an interest rate increase could be on the way this month”•if US employment and inflation remain in line with expectations.
Analysts interpreted that as a clear sign that the central bank will raise the benchmark lending rate at the March 14-15 policy meeting.
The Fed last raised the federal funds rate in December”•only the second increase in a decade”•but Yellen’s comments confirm the expectation of another move following recent statements from other Fed officials.
The Fed’s policy-setting rate committee “will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in a speech to a Chicago business group.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, summed up Yellen’s speech in one line: “They’ll hike this month unless payrolls are disastrous.”
The Fed will get to see one more employment report before they decide the direction of interest rates, when the Labor Department releases data for February on March 10, and will see two inflation reports the following week.
Yellen’s comment that a March increase could be appropriate “is about as blunt a statement of near-term policy intent as we have ever seen from (the) Fed chair,” Shepherdson said.
And “it means that the Fed will hike unless next week’s payroll report is calamitous.”
Barclays analysts agreed, and also highlighted Yellen’s comments on the reduced economic risks in the global economy.
“In our view, this show of confidence in both domestic and external conditions suggests the committee is increasingly comfortable continuing to tighten policy further,” they said.
However, Yellen said central bankers continue to believe they will only need to raise rates “gradually” assuming the economic data “continue to come in about as we expect.”
“Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability,” she said.
She cautioned that monetary policy “cannot be and is not on a preset course,” although it is likely to happen faster this year than last.
In the face of some critics, even among Fed officials, who say the central bank risks allowing inflation to rekindle by raising rates so slowly, Yellen defended the committee’s performance.
She acknowledged that waiting too long to raise rates could mean the Fed has to hike more rapidly at some point, which “could risk disrupting financial markets and pushing the economy into recession.”
However, Yellen said, “I currently see no evidence that the Federal Reserve has fallen behind the curve.”
Many economists have pointed to the Fed’s preferred measure of inflation, which recently reached a targeted two percent annual rate, but Yellen noted that higher energy prices are contributing to that increase and could be temporary.
Fed officials in December projected three rate hikes this year, but in the wake of the 2008 financial crisis, the Fed’s moves have been “at a slower pace than most FOMC participants anticipated in 2014.”