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July 13, 2017

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Yellen: economy strong enough for rate hikes

THE United States is healthy enough to absorb further gradual rate increases and the slow wind-down of the massive bond portfolio accumulated by the Federal Reserve during the financial crisis, Fed Chair Janet Yellen said yesterday morning.

In what may be one of her last appearances on Capitol Hill, Yellen depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment, and was now being supported as well by stronger economic conditions abroad.

The Fed “continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time,” Yellen said, while reductions in the Fed’s more than US$4 trillion in securities are likely to begin “this year.”

But she also noted that given current estimates, the federal funds rate “would not have to rise all that much further” to reach a neutral level that neither encourages nor discourages economic activity. The Fed still feels the economy needs loose, or accommodative, monetary policy, so a lower neutral rate means the Fed may feel compelled to slow the pace of rate hikes down the road.

But for now, Yellen told members of the House Committee on Financial Services that the economy remains strong enough for the Fed to continue its plans to gradually tighten policy. A question and answer session with lawmakers follows her prepared remarks.

Yellen’s appearance comes as the Trump administration mulls whether to replace her when her term ends in February.

In a report released last week the Fed compared its current policy to that prescribed by a variety of such rules. It pointed out that the choice of a rule itself involved judgments that would lead to vastly different outcomes.

By her testimony yesterday, the economy is currently on an even keel, near or beyond full employment. Interest rates are rising, and “would not have to rise all that much further” to reach what the Fed considers a neutral rate that neither encourages nor discourages spending and investment, Yellen said. The reduction in the balance sheet, which will begin slowly as the Fed reinvests only a portion of the holdings that mature each month, will mark the final exit from crisis-related policies.


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