Federal Reserve Chairwoman Janet Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank's goals.
“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,” Ms. Yellen said in a speech Friday to central bankers and economists in Jackson Hole, Wyo.
Ms. Yellen also said the economy is “nearing” the Fed's goals of full employment and stable prices. She didn't discuss the specific timing of a rate move in her first public comments since June.
“September is certainly on the table, a possibility, and being considered,” said Laura Rosner, senior U.S. economist at BNP Paribas. “She strongly is keeping that in place. I think she's putting the emphasis on the data and how the labor market performs, and that's really what we should be watching.”
The Federal Open Market Committee raised its target for the federal funds rate to a range of 0.25% to 0.5% in December, after keeping the benchmark near zero for seven years. The FOMC's next meeting is Sept. 20-21.
Despite their repeated intentions to raise the rate again, officials have skipped a hike at all five meetings this year, and futures markets have priced in about a 30% chance of another increase next month, the second-to-last gathering before presidential elections in November.
“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Ms. Yellen said at the Kansas City Fed's annual conference, the title of which is “Designing Resilient Monetary Policy Frameworks for the Future.”
“Looking ahead, the FOMC expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years,” Ms. Yellen said. “Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”
A Commerce Department report released earlier Friday showed the U.S. economy grew less than previously reported last quarter on lower government outlays and a bigger depletion of inventories, capping a sluggish first-half performance propped up mainly by consumer spending. GDP, the value of all goods and services produced, rose at a 1.1% annualized rate, down from an initial estimate of 1.2%, the report showed.
“If there was some doubt about whether or not rates will come up this year, there are fewer doubts today,” said Roberto Perli, a partner at Cornerstone Macro. “September? Let's see how the employment data come in. If it's another strong one, a lot of people on the FOMC will have a strong case to move.”
The Labor Department releases the August payroll report on Sept. 2. Analysts surveyed by Bloomberg expect employers added 185,000 jobs last month after adding 255,000 in July, and they predict the unemployment rate nudging down to 4.8%.
The Fed chairwoman's speech comes amid a reassessment among central banks globally about future strategies for monetary policies, a topic she addressed in the second half of her remarks. Aging populations, declining productivity and below-target inflation rates are likely to result in lower peaks in their policy interest rates. That means central banks are likely to reach the zero boundary on their policy rates faster in the next recession.
Ms. Yellen's review of the Fed's “toolkit” began with a spirited defense of techniques used during the financial crisis, including bond purchases and pledges to hold rates low for an extended period. She made clear the Fed should retain those new tools. Those might be needed again as the next recession might arrive before interest rates rise to levels normally seen during an economic recovery, she said.
“We expect to have less scope for interest rate cuts than we have had historically,” Ms. Yellen said.
Without embracing their views, Ms. Yellen acknowledged that economists, including some prominent Fed officials, have suggested the Fed consider broadening its asset purchases if that strategy is required again, and raising its inflation target. “The FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research,” she said.