Yellen confident U.S. economy is on the mend
The Federal Reserve is edging closer to raising interest rates for the first time since the housing crash leveled the U.S. economy.
Speaking before the Economic Club of Washington on Wednesday, Fed Chair Janet Yellen expressed confidence that the economy is likely to grow at a modest pace, supported by continued gains in hiring and a small rise in inflation.
"On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market," Yellen said in her prepared remarks. "And, as I have noted, continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term."
A rate hike would mark an important inflection point for the U.S. economy, which has struggled to regain its footing since the Great Recession officially ended in mid-2009. Although growth this year has been modest, steady job-creation has reduced the unemployment rate to 5 percent, the lowest level since April 2008.
The decline in joblessness is boosting worker wages, which have seen tepid growth during the recovery. More recently, however, "We have seen a welcome pickup in the growth rate of average hourly earnings for all employees and of compensation per hour in the business sector," Yellen said.
Most economists and market analysts expect the Federal Open Market Committee, the Fed's rate-setting panel, to begin raising rates when it issues the body's latest policy statement on Dec. 16. Another key measure of the economy comes on Friday, when the U.S. Labor Department reports on November job growth.
A Fed rate hike is "almost a certainty in two weeks," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Advisors.
The central bank last boosted the federal funds rate -- what banks charge each other for overnight loans -- nine years ago. With growth slowing, the central bank started lowering rates in 2007 before embarking on a series of rapid-fire cuts in 2008 aimed at shoring up the weakening economy.
U.S. financial markets were largely flat before Yellen's speech and moved little after the text of her remarks was released, suggesting that most investors are already pricing in a December rate hike.
In recent weeks, consensus has grown within the Fed that the economy is now strong enough to withstand higher interest rates. Separately on Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech in Florida that the case for a December rate hike is "compelling," highlighting solid job growth this year.
Looking ahead, he expects continued employment gains and rising household income to drive consumer spending in 2016, which should encourage hiring.
When the Fed does move to raise interest rates, the "liftoff" is likely to be gradual. Economists predict an initial hike of no more than 0.25 percent.
Fed Governor Lael Brainard, widely viewed as a "dove" on monetary policy, on Tuesday also emphasized the need for caution in adjusting monetary policy, saying in a speech that the economy is more fragile now than before the recession.
Echoing that view, Yellen on Wednesday pointed to signs that the economy has yet to fire on all cylinders, saying that "we cannot yet, in my judgment, declare that the labor market has reached full employment."
But some forecasters think stronger-than-expected inflation could force the Fed to raise rates more aggressively next year.
"There is much more uncertainty in the markets on the Fed's forward path," said Rehling, who predicts the central bank will follow a December increase with two additional hikes in 2016, with one likely in the summer and the second in December. "They'll chose to avoid any moves in the heat of the election cycle."