U.S. Federal Reserve Chair Janet L. Yellen has hinted that an increase in interest rates “could well become appropriate relatively soon” if incoming economic data continues to show positive signs.
In her speech before the Joint Economic Committee of the U.S. Congress in Washington, D.C., Yellen said the U.S. economy made further progress this year toward the Fed's dual-mandate objectives of maximum employment and price stability.
Yellen noted that job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force.
The unemployment rate, which stood at 4.9 percent in October, has held relatively steady since the beginning of the year.
“The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more "room to run" than anticipated earlier,” added Yellen.
Yellen further said that U.S. economic growth appears to have picked up from its subdued pace earlier this year. After rising at an annual rate of just 1 percent in the first half of this year, inflation-adjusted gross domestic product is estimated to have increased nearly 3 percent in the third quarter.
With regard to the outlook, Yellen expects economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee's 2 percent objective over the next couple of years.
“This judgment reflects my view that monetary policy remains moderately accommodative and that ongoing job gains, along with low oil prices, should continue to support household purchasing power and therefore consumer spending.
“In addition, global economic growth should firm, supported by accommodative monetary policies abroad. As the labor market strengthens further and the transitory influences holding down inflation fade, I expect inflation to rise to 2 percent,” says Yellen.
Yellen said that further delaying a rate increase would present its own risks. “Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”