Federal Reserve Chair Janet L. Yellen declined to say whether the central bank would raise interest rates at its upcoming meeting in March in testimony before Congress on Tuesday, though she also said it would be “unwise” to wait too long to hike rates.
In her semiannual report to the Senate Banking Committee, Yellen said that the U.S. labor market continues to strengthen, but she urged the government to focus on improving the long-run productivity of the economy.
Yellen indicated that the Fed would be carefully watching to see whether inflation accelerates in the months to come, as well as how the planned tax cuts, infrastructure spending and other measures promised from the Trump administration would affect American workers and the economy.
“We don’t want to base current policy on speculation about what may come down the line. We will wait to gain greater clarity on policy changes,” Yellen said, describing the administration’s future policy actions as “one of many factors” that could affect the central bank’s decisions on when to raise interest rates.
Markets expect the Fed to increase interest rates two or three times this year, as strengthening economic growth translates into rising wages and prices. On Tuesday morning, futures markets put the chance of a rate hike in March at about 18 percent, with more investors confident of a rate increase in May or June.
In her testimony, Yellen emphasized that the economy had added nearly 16 million jobs since employment hit a trough in early 2010, and that the unemployment rate had fallen by more than half from its peak in 2010 to January. Business sentiment has continued to improve in recent months, while inflation has moved up, as the effects of earlier declines in energy and import prices have diminished, Yellen said.
Yet economic growth has remained somewhat sluggish, with the gross domestic product expanding just 1.6 percent last year, the slowest growth since 2011. On Tuesday, Yellen called the current growth rate “disappointing.”
In its meeting in February, the Federal Reserve choose to leave its key interest rate unchanged, though it suggested that the environment for rate increases is improving and measures of consumer and business sentiment continue to strengthen. In December, the Fed raised interest rates for the second time in nearly a decade, to its current range of between 0.5 percent and 0.75 percent.
The committee probed Yellen on when the central bank would begin paring down its $4.5 trillion balance sheet of mortgage-backed and Treasury securities, which it acquired in an effort to ease lending and stimulate the economy following the financial crisis. Some critics believe the Fed’s massive balance sheet is distorting market interest rates and have urged the central bank to move more quickly to unwind it.
In response, Yellen emphasized that the central bank wants to be well on its way in the process of raising interest rates before it allows these assets to gradually mature and run off the balance sheet. That way, the Federal Reserve could have scope to cut interest rates if attempts to reduce its balance sheet were to disrupt economic growth.
“We want to wait to start this process until the process of normalization is well underway,” Yellen said.
Expectations for more spending and tax cuts under the Trump administration have driven up stock markets in recent weeks. U.S. stock indexes opened slightly lower Tuesday morning after breaching record highs on Monday.
Yet Yellen’s testimony suggested the Federal Reserve does not unanimously agree that the new administration’s policies will boost growth or inflation in coming months. In previous comments, Yellen indicated that about half of the committee that decides interest rates had taken the effect of fiscal measures on the economy into account in their interest rate projections.
President Donald Trump will have the opportunity to significantly shape the actions of the central bank in years to come, by appointing three new governors to the Board of Governors, the body that helps to set interest rate policy.
On Friday, Federal Reserve Governor Daniel Tarullo, who served as the point person for financial regulation under President Barack Obama, announced that he would step down from his post nearly five years before the end of his term. Yellen’s term is set to expire on Feb. 3, 2018. On Tuesday, she reiterated that she intended to serve out her full term as chair.
Both during his campaign and after his election, Trump accused Yellen of keeping interest rates low to politically benefit the Obama administration. In September, he told CNBC that Yellen should be “ashamed” of herself.
Yellen and other Fed bankers have fervently denied the accusations. “I can say emphatically,” she said during a September news conference, “that partisan politics plays no role in our decisions about the appropriate stance of monetary policy.”
“There could be a lot of turnover on the Fed in the next couple of years, but I would say that the Trump administration needs to think really carefully about the people they put up as nominees,” said Stephen Oliner, a resident scholar at the American Enterprise Institute. “They need to be people who the market finds credible and respected. Because nothing will be worse for his plans for the economy if the financial markets don’t trust the Fed.”
Others in Congress have called for abolishing or reining in the power of the central bank, notably with the campaign to “Audit the Fed.” Critics say such actions could compromise the central bank’s independence from the political process.
At the end of last month, Rep. Patrick T. McHenry, R-N.C., the vice chairman of the House Financial Services Committee, sent a scathing letter to Yellen criticizing the Federal Reserve for “negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability, or the authority to do so. This is unacceptable.”
“[T]he Federal Reserve must cease all attempts to negotiate binding standards burdening American business until President Trump has had an opportunity to nominate and appoint officials that prioritize America’s best interests,” the letter said.
Stephen G. Cecchetti, a professor at Brandeis International Business School and a former adviser at the Bank for International Settlements in Basel, Switzerland, criticized the letter in a blog post, saying that U.S. regulators have played a major role in shaping international financial regulations in past decades, to the benefit of American consumers and businesses. U.S. regulators are not required to implement international standards, but rather choose to do so because they think they are appropriate, he said.
“It would isolate the U.S. financial system,” said Cechetti. “The nature of New York as a financial center would be put at risk.”
Other proposals by Congress have suggested tying the Fed’s monetary policy decisions to a mathematical formula. On Tuesday, Yellen said that one suggested formula, called the Taylor rule, would currently stipulate an interest rate of between 3.5 and 4 percent, far higher than the Fed’s current interest rates, a change which would have a substantial effect on the economy.
“I believe we would have a much weaker economy if . . . we had followed the dictates of that rule,” she said.
On Feb. 3, Trump signed an executive order asking the Treasury Department to carry out a review of all existing financial regulations, to judge whether regulations are acting to support certain “core principles.” The act was widely seen as an effort to repeal the curbs put in place after the financial crisis by the Dodd-Frank Act.
In her comments, Yellen said she agreed with the core principles and looked forward to working with the new treasury secretary to uphold them.
(c) 2017, The Washington Post · Ana Swanson