Rate hike likely if economic progress persists

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Federal Reserve Chairwoman Janet Yellen said an interest rate increase would “likely be appropriate” at the central bank’s upcoming meeting if employment and inflation continue to meet policy makers’ expectations.

“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in prepared remarks delivered Friday at the Executives’ Club of Chicago.

That decision will come on March 15 following a two-day meeting in Washington. A March 10 employment report is the most significant data report standing between officials and decision day, and economists expect a solid 190,000 payrolls gain in February. The Fed will get a CPI inflation reading the day of its meeting, but won’t get another look at its preferred inflation index until March 31.

Markets see a 92% chance of a rate increase this month, up from just 40% a week ago, after top Fed officials including New York Fed President William Dudley and Governor Lael Brainard signaled they’re willing to lift rates soon. Those probabilities are typically determined using futures contracts for the fed funds rate. Inflation and employment data have been meeting policy makers’ expectations and growth abroad is either stable or slowly improving, clearing the way for gradual increases.

“I currently see no evidence that the Federal Reserve has fallen behind the curve, and I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate,” Yellen said Friday. However, “unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”

Lifting the benchmark rate this month would leave the Fed well-positioned to achieve the three 2017 hikes officials expected in December, when it released their latest Summary of Economic Projections. It will publish new estimates following this month’s meeting.

Data suggest the central bank is closing in on its two goals: stable inflation near 2% and maximum employment. The Fed’s preferred inflation gauge has moved up to 1.9%, though that partly owes to volatile oil prices and part of the move could prove transitory.

Unemployment has fallen to 4.8%, roughly in line with the level the Fed views as sustainable over the longer term. What’s more, some wage measures are showing nascent signs of life, an indication that labor markets are tightening.

Perhaps the largest difference from last year is that as the U.S. economy makes strides, fewer risks loom on the global economic horizon to scare Fed officials off of raising rates.

“On the whole, the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat,” Yellen said in her prepared remarks. “The Committee currently assesses that the risks to the outlook are roughly balanced.”

Bloomberg News
Interest rates Economy Janet Yellen Federal Reserve