While Yellen did not give guidance on what the central bank needs to see before raising rates, she said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices.
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“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”, she added. It may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.
Still, Yellen declined to say when a rate hike would happen, falling back on what has become a common refrain that the decision would be based on the latest economic data.
The Fed has said it could raise rates twice this year, but the market has been focused on one hike at most and more likely December, than any other month, given the inconsistency of data and the USA presidential election.
Meanwhile, the Commerce Department reported Friday that USA gross domestic product rose 1.1% in the second quarter, below a previous estimate of 1.2%.
“The Fed served notice that a rate hike is still a possibility this year, and the markets had gotten a little complacent”, said Anthony Valeri, investment strategist for LPL Financial in San Diego.
The Fed raised its fed funds rate target to between 0.25 and 0.5 per cent in December, its first hike in almost a decade, but has held off further increases this year due to a global growth slowdown, financial market volatility and tepid USA inflation data. That was when it raised its benchmark lending rate from near zero, where it had been since the depths of the financial crisis in 2008. Belisle said the majority of investors expecting a raise in the rate before the end of the year.
In her speech, Yellen said the Fed still believes that future rate increases, whenever they occur, will be “gradual”.
Such a view is “exaggerated”, Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions.
But other economists have said they think December remains a more likely time for a resumption of rate increases.
Yellen is the lead-off speaker Friday for an annual conference attended by members of the Fed’s board of governors in Washington, officials from the Fed’s 12 regional banks and monetary leaders from around the world.
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In Japan, consumer prices posted their biggest annual drop in three years in July due to weak consumption, increasing pressures on the central bank to further boost its economic stimulus program. The group of policy activists, labor unions and community groups has been lobbying the Fed to keep rates low to allow the economy to strengthen enough to benefit more Americans. So the question is: are you taking a lot of risk there?
