Federal Reserve chair says gradual increases are ‘appropriate’ but warns that historically low rates could hinder attempts to fight recession in near future

The Federal Reserve could raise interest rates a second time in one year in the coming months, chair Janet Yellen said on Friday. Delivering her annual speech at the Jackson Hole economic symposium in Wyoming, Yellen said gradual increases in interest rates were “appropriate” and the case for another had “strengthened”.

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“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the committee’s outlook.”

According to Andrew Hunter of the consultancy Capital Economics, Yellen’s remarks and recent economic data improve the odds of a September rate hike. The odds will improve further still if the US economy adds 180,000 or more jobs this month, he said.

The Federal Open Market Committee (FOMC), the policy-setting branch of the Fed, has met five times this year; each time, its members voted to hold off on raising interest rates. Minutes from the most recent meeting revealed concern over Britain’s vote to leave the European Union and a potential slowdown in job creation. “Several long-term global risks related to Brexit remained,” the minutes noted.

In Jackson Hole, Yellen noted that in the absence of hikes, interest rates have remained historically low, which could hinder the Fed’s ability to fight recession in the near future. By lowering interest rates, the Fed provides an incentive for businesses and consumers to take out loans and to spend money, thus fueling the economy. But as interest rates are already low, the Fed may not be able to lower them as far as it might have in the past.

“Forecasts now show the federal funds rate settling at about 3% in the longer run,” Yellen said. “In contrast, the federal funds rate averaged more than 7% between 1965 and 2000. Thus, we expect to have less scope for interest rate cuts than we have had historically.”

She ended by saying that despite historically low interest rates, “monetary policy will, under most conditions, be able to respond effectively”.

Earlier this month, 95 economists polled by Reuters said there was only a 25% chance of a rise in September, and most expected just one rate hike this year. The Fed is set to meet in September, October and December, the month seen as most likely for the next hike.



Last December, the Fed raised interest rates for the first time in almost a decade, bringing the interest rate range to 0.25%-0.50%.



James Bullard, president of the St Louis Fed, said on Friday he was agnostic on when the next rate hike might come.

“I do like to move on good news about the economy,” he said in a CNBC interview. “If we got to a meeting and we felt things were looking stronger, that might be a good time to do that.”

Bullard that while the labor market was “pretty strong” and there had been a couple of good jobs reports recently, US GDP remained low. On Friday, the Department of Commerce announced that during the second quarter the economy grew at a rate of 1.1% – up from 0.8% in the first quarter but lower than the expected 1.2%.

Hunter, of Capital Economics, said: “With real GDP expanding by just 1.2% over the past 12 months and inflation continuing to run below target, we still think most Fed officials will want to wait until December before next raising rates.”

On Thursday, some Fed members met with activists from the pressure group Fed Up, who have been attending the Jackson Hole meeting. Wearing green shirts that read “We need a people’s Fed”, activists called on the central bank to hold off raising interest rates and focus instead on driving down unemployment rates for black and Latino Americans.

San Francisco Fed president John Williams warned the activists that waiting too long to raise interest rates could throw the economy “out of whack”. “It takes a couple of years for monetary policy to have its full effect on the economy and if we wait too long, it could lead to a recession,” he said.

The overall unemployment rate in the US has remained steadily at or below 5% since October 2015. In July, the unemployment rate for white Americans was 4.3%; the rate for black Americans was 8.4%, and for Latino Americans it was 5.4%. Activists say one of the reasons for this is a lack of diversity at the Fed.

Meeting the activists, New York Fed president William Dudley described diversity at the Fed as “pretty lousy”.

“I completely believe in diversity and inclusion and we are working to do better,” he said.