Yellen upbeat on economy as growth ramps up

30/11/2017 07:37 AST

Outgoing Federal Reserve Chair Janet Yellen offered an upbeat assessment of the US economy on Wednesday, saying the growth rate has picked up the pace in recent months.

She reaffirmed that the Fed expects to raise interest rates only gradually. However, she steered clear of signaling a rate hike at the December policy meeting, which her designated successor, Jerome Powell, offered on Tuesday.

“The US economy has strengthened further this year,” despite the impact of two late summer hurricanes, Yellen said in testimony before the Joint Economic Committee of Congress. “Economic growth appears to have stepped up from its subdued pace early in the year.” Just after her comments were made public, the government released data showing the economy grew by 3.3 per cent in the third quarter, the second straight quarter with growth over three per cent, which President Donald Trump has set as his goal. Even so GDP expansion for the full year is likely to be significantly slower.

Given the positive developments, Yellen said central bankers “continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labour market and stabilize inflation.” Yellen noted that despite solid growth and an unemployment rate of 4.1 per cent, six points below the 2010 peak, wage growth has been modest and inflation has continued to run below the Fed’s two per cent target. The Fed’s preferred measure of year-on-year inflation was only 1.6 per cent in September.

But she continues to believe the “surprisingly subdued” inflation is due largely to transitory factors, although she has not ruled out the possibility “something more persistent” is at work. In his nomination hearing on Tuesday, Trump’s pick to replace Yellen was surprisingly direct in seeming to confirm widespread expectations the Fed will raise the benchmark lending rate in December, the third increase this year.

“I think that the case for raising interest rates at our next meeting is coming together,” Powell said.

While he stressed that the final decision on the key lending rate will be made at the December 12-13 monetary policy meeting, he said “conditions are supportive of doing that.” - Boosting growth - Trump earlier this month nominated Powell to replace Yellen, the first woman to lead the Fed. She will leave in February after just one term. No first-term US president has replaced a sitting Fed chair in 40 years.

As Congress moves closer to enacting a massive tax cut, Yellen said there are steps it can take to boost the growth capacity of the US economy.

“To generate a sustained boost in economic growth without causing inflation that is too high, we will need to address these underlying causes,” she said.

The Gulf Today