It’s happening: The Federal Reserve is going to raise rates on December 16.
Speaking at the Economic Club of Washington, D.C. on Wednesday, Fed chair Janet Yellen laid out her thinking on whether the time has come for the Fed to begin the process of raising rates.
And it seems clear that Yellen believes it has.
Here’s the key passage (emphasis added):
However, we must also take into account the well-documented lags in the effects of monetary policy. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.
And that’s really the whole story.
Does the Fed want to be forced to raise rates at every meeting in, say, 2017 to tamp down inflation running well above target? No, that could tip the economy into recession.
And does the Fed want to do more quantitative easing following a financial crisis it judges was caused by undue market risks taken in response to its own interest rate policy? Definitely not.
The time, then, to begin raising rates for the Fed is now.
We’d note that ahead of this passage Yellen emphasized that risks with regard to Fed policy remain asymmetric, which has been the core argument of folks like Paul Krugman, who believes the Fed would be acting inappropriately by raising rates with inflation below its 2% target.
The idea here is that were the Fed to cut off a feeble economic recovery by raising rates, they’d be left with little room to maneuver (i.e. cut rates) in order to stabilize or encourage economic growth.
Additionally Yellen also cautioned that no decisions have been made, with the Fed still weighing economic data as it comes in. To this end, Friday’s jobs report would seem an important entry into the ledger.
Yellen also cautioned that in her view the labor market has not reached « full employment, » or the point at which you can judge the economy has absorbed all available employees and wage growth begins to accelerate. On the inflation outlook, however, Yellen said that expectations remain « well-anchored, » and said she expects price increases will come up to the Fed’s 2% per year target over the next few years.
The Fed itself, and in particular Chair Yellen, is a reserved institution that wants to maintain optionality, particularly in the face of markets that hang on nearly their every word. And those who want to argue any particular interpretation of Yellen’s words are still more or less equipped to do that.
But Wednesday’s comments are about as forward as we’ve seen Yellen during her time as Fed chair, and the message, to our mind, is clear: rate hikes are coming, two weeks from today.
from Business Insider http://ift.tt/1YIiIcZ