Despite concerns about low inflation in the United States, the head of the U.S. central bank says raising interest rates gradually would be the most appropriate policy stance for the Federal Reserve.
“It would be imprudent to keep monetary policy on hold until inflation is back to two percent,” Fed Chair Janet Yellen said Tuesday, while speaking to the National Association for Business Economists (NABE) in Cleveland, Ohio.
Inflation, a sustained increase in the price of goods and services, has remained consistently below the Fed’s target rate of 2 percent. But even with uncertainty about the possible reasons for the low rate of inflation — from misjudging the strength of the labor market to the impact of foreign competition on the global supply chain — Yellen said the Fed “should be wary of moving too gradually.”
The Federal Reserve has kept its benchmark lending rate near record lows since the 2008 financial crisis to stimulate the U.S. economy. It has raised its interest rate three times since last December. The federal funds rate, the interest rate the central bank charges banks on overnight loans, currently sits in a range between one and one-and-one-quarter percent.
Ellen Zentner, chief economist at Morgan Stanley, says her biggest takeaway from the Cleveland speech was Yellen’s confidence that “a strong U.S. labor market would ultimately drive inflation closer to the Fed’s two percent goal over the next few years.”
Equity markets, which have benefited from low borrowing costs, anticipate a fourth rate hike in December, and possibly three more next year. Starting next month, the Fed says it will begin the process of “unwinding,” or selling off, the massive holdings of bonds and securities it has acquired since 2008.
But Yellen’s longer-term goals may be subject to change. Her four-year term as the nation’s top banker ends in February. President Donald Trump has not said whether he plans to re-appoint Yellen or overhaul the central bank’s seven-member board of governors.
Zentner believes there is a 60 percent chance Yellen will be named to serve a second term. “The longer the president waits, the greater the probability that Yellen will be re-appointed,” the bank economist said.
Yellen spoke in Cleveland as the Conference Board released a survey that showed consumer confidence declined in September. The global business research group reported consumers’ views about the strength of the U.S. labor market have weakened and home sales have dropped to an eight-month low due to Hurricanes Harvey and Irma in the states of Texas and Florida.