Yellen signals confidence ahead of Fed rate decision

Yellen also warned that keeping policy too easy for an extended period of time presents risks to the economy. Photo / Getty

Federal Reserve Chairwoman Janet Yellen said she is increasingly confident that the economy is growing sufficiently to achieve labor-market improvement and higher inflation, laying the groundwork for a December interest-rate increase if data hold up.

"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 told the Economic Club of Washington on Wednesday, according to a text of 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."

The policy-setting Federal Open Market Committee meets in Washington Dec. 15-16 and is widely expected to raise interest rates, which have been held near zero since 2008. Fed officials have been trying to gauge whether the economy is headed toward their goals and can sustain growth as rates increase, making Yellen's comments a positive sign that the Fed is on track for a potential increase.

Yellen will also testify Thursday before Congress's Joint Economic Committee.

Yellen on Wednesday emphasized that policy makers will receive a range of data on the labor market, inflation and economic activity between now and the December meeting that will influence their decision. Still, she pointed to recent improvements in the labor market and wages as positive signs.

"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," she said.

While it is too soon to conclude whether these more rapid rates of increase will continue, a sustained pickup would likely signal a diminution of labor market slack.

U.S. employers added 271,000 jobs in October, the most this year, and unemployment has dipped to 5 percent, half of its 2009 peak. The Labor Department's gauge of average hourly earnings has shown early signs of picking up, with 2.5 percent year-over- year growth in October, the highest since 2009. The final employment report before the December meeting is scheduled for release on Friday in Washington.

Even so, inflation remains subdued, and the Fed's preferred gauge hasn't hit its 2 percent goal since 2012. Yellen signaled confidence that price pressures may be moving up, referencing core inflation rather than the headline index the Fed prefers.

The Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

"It appears that the underlying rate of inflation in the United States has been running in the vicinity of 1-1/2 to 1-3/4 percent," Yellen said, once the core data are adjusted for downward pressure from low oil prices and a stronger dollar. She noted that policymakers are paying close attention to indicators of inflation expectations, some of which have shown deterioration recently.

The initial rate liftoff is expected to be small, just 25 basis points, and Fed speakers including Yellen have emphasized that the pace of tightening going forward is more important than the timing.

"The Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run," Yellen said Wednesday.

Yellen also warned that keeping policy too easy for an extended period of time presents risks to the economy.

"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," and that pace would risk disrupting financial markets and pushing the economy into a recession, Yellen said. "Holding the federal funds rate at its current level for too long could also encourage excessive risk- taking and thus undermine financial stability."