(WASHINGTON D.C., Reuters) The U.S. economy is healthy enough for the Fed to move forward with plans to raise rates and begin winding down its massive bond portfolio, though low inflation and a low neutral rate may leave the central bank with diminished leeway, Fed Chair Janet Yellen said on Wednesday (July 12).
In what may be one of her last appearances before Congress, 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 in her prepared testimony.
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 past appearances before the House panel have sometimes involved sharp exchanges with lawmakers who think the Fed’s influence over the economy has grown too strong, and who want policymakers to be guided more closely by a mathematical rule for setting interest rates.
Her appearance comes as the Trump administration mulls whether to replace her when her term ends in February.
Following her remarks, U.S. stocks rose while yields on Treasury bonds fell and the dollar declined against a basket of currencies.