Yellen Signals Solid Economy Would Spur December Rate Hike

Yellen: The U.S. Economy Is Performing Well
  • Fed chair's testimony pushes U.S. Treasury yields higher
  • Yellen says December interest-rate hike a `live possibility'

Fed Chair Janet Yellen said an improving economy has set the stage for a December interest-rate increase if economic reports continue to assure policy makers that inflation will accelerate over time.

“At this point, I see the U.S. economy as performing well,” Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington.

“Domestic spending has been growing at a solid pace” and if the data continue to point to growth and firmer prices, a December rate hike would be a “live possibility,” she said in response to a question from Representative Carolyn Maloney, a New York Democrat.

Yellen’s testimony drove the yield on two-year U.S. Treasury notes to as high as 0.82 percent. The Standard & Poor’s 500 Index of U.S. stocks was down 0.17 percent at 12:14 p.m.

U.S. 2-year note
U.S. 2-year note

The Federal Open Market Committee in its October statement said it will consider raising interest rates at its “next meeting,” citing “solid” rates of household spending and business investment.

Liftoff Odds

“There are pretty good odds that the Fed will hike rates in December as long as employment perks back up and the unemployment rate slips further, which is what we are looking for,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “She is trying to keep the Fed’s options open in December.”

No decision has yet been made on the timing of a rate increase, Yellen cautioned.

Yellen appeared before the House Financial Services Committee to testify primarily on the Fed’s supervision and regulation of financial institutions.

“What the committee has been expecting is that the economy will continue to grow at a pace that’s sufficient to generate further improvements to the labor market and to return inflation to our 2 percent target over the medium term,” she said.

U.S. central bankers have held the policy rate near zero since 2008 as they have waited for labor markets to move closer to their goal of full employment.

Jobless Rate

The unemployment rate stood at 5.1 percent in September, slightly above the 4.9 percent rate that officials estimate would satisfy their mandate. The Bureau of Labor Statistics will release the October jobs data Friday.

“I see under-utilization of labor resources as having diminished significantly since earlier in the year, although recently we’ve seen some slowdown in the pace of job gains,” Yellen said.

The Fed has missed its 2 percent inflation target for more than three years, and its Oct. 28 statement said they need to be “reasonably confident” that prices will rise toward their goal before raising rates.

Inflation Expectation

“If we were to move, say in December, it would be based on an expectation, which I believe is justified, that -- with an improving labor market and transitory factors fading -- that inflation will move up to 2 percent,” Yellen said.

Michael Gapen, chief U.S. economist at Barclays Capital Inc. in New York, said Yellen’s comments on inflation served to deflect an argument outlined in October by Fed Governor Lael Brainard that the central bank should wait to see movements in inflation before raising rates.

Yellen rejected that argument in favor of a “forecast-based decision,” Gapen said.

“The divide in the committee was essentially over whether they should move in advance of inflationary pressure or wait to see it,” he said. “This clearly says the forecast-based side won that argument.”

‘Base Case’

While Gapen said a December hike is now the Fed’s “base case,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, disagreed.

“The economy has to show further improvement for Yellen to actually steer the committee to December liftoff,” he said. “They have put the market on notice, but now the economic data has to cooperate or they may very well delay the 2015 liftoff into early next year.”

Economic growth slowed to a 1.5 percent annualized pace in the third quarter, according to the government’s advance estimate on gross domestic product. However, low gasoline prices and employment, and income gains are projected to sustain spending.

The pace of growth will quicken to a 2.7 percent rate in the final three months of the year, according to economists surveyed by Bloomberg.

December Meeting

Fed officials’ last meeting of the year will be held Dec. 15-16, and it includes a press conference with Yellen and a new set of forecasts from policy makers.

In response to a question from Minnesota Republican Tom Emmer, Yellen said she wouldn’t rule out using negative interest rates to help stimulate the economy in the event that another serious downturn occurs before the central bank can lift rates away from zero.

"I don’t at the moment see a need for negative interest rates,” she said. "If circumstances were to change” she added, "potentially anything, including negative interest rates, would be on the table."

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