Economy

Janet Yellen Speaks and Fed Rate Hike Now Looks Closer Than Ever

Jon C. Ogg

Published: December 2, 2015 1:05 pm

Last Updated: January 13, 2020 4:33 pm

If you have listened to the Federal Reserve speeches and interviews of late, you have been warned over and over that the Federal Reserve wants to raise interest rates. This is not a boom-time rate hike, but a move away from a time of panic. And now Fed Chair Janet Yellen’s speech on Wednesday, December 2, 2015 at the Economic Club of Washington, in Washington, D.C., is signaling that this expected interest rate hike is now closer than ever.

24/7 Wall St. would again tell investors that the Fed quite simply wants to get rates off of zero. Problems in Europe, Russia, China and the nations around Brazil just are not yet acting like a material drag to keep the Fed from hiking. That is as of today, but Yellen’s speech comments keep pointing to a coming rate hike.

Yellen expresses confidence ahead of the December Federal Open Market Committee (FOMC) meeting. She expects continued economic growth and further improvements in the labor market. That helps to bolster confidence in the inflation target of 2%. The risks to the outlook for economic activity and the labor market look very close to balanced. A neutral fed funds rate is currently low and likely will rise only gradually over time.

Yellen also said that economic conditions may warrant keeping rates below the normal long-run level for some time and that monetary policy will remain accommodative even after the first rate hike. This quote stands out:

Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.

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Key additional points from Yellen’s speech were as follows:

• The underlying rate of inflation appears to be 1.5% to 1.75%, with low oil prices and a strong dollar holding down core inflation by 0.25% to 0.50%.
• The labor market has not yet reached full employment; a significant number of people not in the labor force would accept jobs in a stronger labor market.
• Household spending growth looks particularly solid and auto purchases are especially strong.
• U.S. GDP growth is moderate and held back by weak exports.
• On the scare of deflation, that is abating; there is convincing evidence that a drag on inflation from lower oil and import prices will diminish in 2016
• Downside risks from abroad have abated; China has taken stimulative action, but can do more if needed.
• The drag on U.S. growth from low oil and a strong dollar should diminish in the next couple of years.

FULL YELLEN SPEECH