16 June 2019

Rate Increases Draw Nearer

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Federal Reserve Chairwoman Janet Yellen sought to lay the groundwork for interest-rate increases later this year and sounded positive notes on the economy’s performance in the past six months. If the economy keeps improving as the Fed anticipates, she added, the central bank will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

With that warning, the Fed leader subtly shifted the Fed’s public discussion of the outlook for rates, away from assurances that rates would stay low and toward a discussion of when and how fast they would move up. Many Fed officials have said recently they would like to have the option to raise rates at midyear, though they’re not yet sure they will actually move by then.

An important section of her testimony sought to manage the market’s expectations as the Fed looks toward altering its rate guidance. The Fed’s next policy meeting is March 17-18 and officials are worried that when they remove the “patient” reference from their policy statement, investors will believe rate increases are imminent. However, she added that a change in the guidance would put rate increases on the table for discussion at coming policy meetings.

Ms. Yellen laid out inflation developments in the U.S. as a key to the decision on when rates would rise. Inflation has been running below the central bank’s 2% objective for nearly three years and is likely to continue on that path given the recent drop in oil prices. While a stronger job market suggests rate ought to be rising, low inflation gives officials pause.

Fed officials are likely to be hearterned by the market’s response to Ms. Yellen’s subtle warnings that interest rates could be on the rise. Stocks rose modestly after her prepared remarks were released and continued rising during her testimony. Fed officials have been worried that the mere removal of low-rate assurances could spark market turbulence, pushing stocks down and bond yields much higher, as happened in 2012 when the central bank considered ending a bond-purchase program.

During the question-and-answer session, Ms. Yellen spoke strongly against a proposal by Sen. Rand Paul (R., Ky.) that could subject the Fed’s monetary-policy decisions to investigations by the Government Accountability Office. She said it would politicize Fed decision-making and argued the Fed wouldn’t have had the courage to raise interest rates in the early 1980s to beat back inflation if it had been subject to such reviews.

The Fed is navigating a complex economic backdrop. A variety of job-market indicators that Ms. Yellen watches closely are improving. The jobless rate, at 5.7%, is approaching low levels where many Fed officials believe it could settle in for the long run. Payroll growth averaged 280,000 a month in the second half of 2014. Long-term unemployment has dropped and fewer workers are reporting they can only find part-time work.

Click here to access the full article on The Wall Street Journal. 

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