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Janet Yellen doubled down on signals that the Federal Reserve is on the cusp of lifting rates again, predicting that the pace of tightening is likely to accelerate from the sluggish speed set in 2015 and 2016, as the central bank seeks to prevent the US from overheating.
Following a week of hawkish messages from top US rate setters, the Fed chair told an audience in Chicago on Friday that a further increase in short-term interest rates was likely to be “appropriate” at this month’s policy meeting if employment and inflation stay in line with officials’ expectations.
While reiterating her longstanding guidance that changes will happen only gradually, Ms Yellen added that barring unexpected developments, monetary support for the US economy was likely to be reduced at a quicker pace than in 2015 and 2016.
Ms Yellen said: “We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect. Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
Ms Yellen spoke after a procession of her Fed colleagues in recent days hammered home the message that a third rate rise is likely imminent following quarter-point increases in 2015 and 2016. The bullish chorus led to a violent shift in investor expectations, with the markets-implied odds on a March interest rate increase – as indicated by Fed funds futures – jumping from about a third last week to 90 per cent earlier on Friday.
Markets continued to roar higher over the course of the week. Despite dipping towards the end of the week, the S&P 500 index notched up its sixth straight week of gains – with all four of the biggest stock gauges hitting new records on Wednesday – and the 10-year US Treasury yield climbed by 19 basis points, the most since mid-November, to end the week above 2.5 per cent again. The dollar index gained 0.8 per cent over the past five trading days, propelled by bets on a more bullish Fed.
Ms Yellen has traditionally been viewed as an instinctive dove who waits until the last minute before lifting rates. The Fed’s once-a-year pace of tightening in 2015 and 2016 solidified that impression. But a confluence of factors has prompted US policymakers to take a more aggressive approach.
This includes an economy that is at or near full employment, firming price growth that has taken the Fed’s favoured measure of headline inflation closer to its 2 per cent target and solid consumer spending. In addition, many investors are anticipating a looser fiscal policy to emerge from negotiations in Congress.
In her speech Ms Yellen said the US economy had demonstrated “remarkable resilience” in the face of shocks from overseas in recent years, and that developments since mid-2016 have reinforced Federal Open Market Committee members’ confidence that the economy is on track to meet the Fed’s employment and inflation goals. Continuing to raise rates will likely be necessary to keep the US economy from “significantly overheating” in the years ahead, Ms Yellen added.
She said: “Given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.”