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Federal Reserve System

Yellen: Rate hike 'appropriate' in coming months

Paul Davidson
USA TODAY

Federal Reserve Chair Janet Yellen said Friday that the central bank is likely to raise interest rates in coming months if the economy continues to improve as expected.

Yellen did not say whether Fed policymakers are leaning toward hiking the central bank's benchmark rate in June or July, but she said the economy is picking up after a weak first quarter, leaving a move in the next two months on the table.

Stocks in the U.S. initially pared gains after Yellen's remarks but later staged a rebound to close the day with the Dow Jones industrial average rising nearly 45 points to close at 17,873.22. Fed policymakers have indicated they expect to raise interest rates twice this year, which would essentially require an initial hike no later than September. Stocks have been rising since this year's Feb. 11 low as investors have come to terms with the rate hikes.

“If (the economic gains) continue and if the labor market continues to improve, and I expect that will occur… I think it’s important for the Fed to gradually and cautiously increase our overnight interest rate and probably in coming months such a move will be appropriate,” she told Harvard economist Greg Mankiw in a forum at the university. The Fed's next two-day policy meeting is June 14-15.

Her comments echoed the minutes of the Fed’s late April meeting released earlier  this month, which indicated policymakers believe a June rate increase is likely if the economy and labor market continue to progress and weak inflation accelerates. The Fed raised its key rate in December to a range between 0.25% and 0.50%, the first increase in nine years, but has held steady since amid a weak U.S. and global economy and meager inflation.

Rate hike watch: key dates -- and data

Yellen said the main factors holding down inflation – low oil prices and a strong dollar – “seem like they’re stabilizing” while an improving labor market should push up wages, nudging annual inflation back to the Fed’s 2% goal.

“The labor market, by almost any metric, is really improved,” she said. “I definitely think we’ve made a lot of progress but further gains are possible.”

At the same time, she said, “We really haven’t seen much improvement in wage growth,” indicating that despite near-normal 5% unemployment, labor market slack -- such as part-time workers who prefer full-time jobs – provides a surplus labor supply to employers and tempers earnings growth.

Interest rates explained

She also noted that economic growth has been sluggish: “The growth of output has been remarkably slow, something like 2% on average the last several years.” Growth has been even slower the past two quarters, with the economy expanding 1.4% at an annual rate in the fourth quarter and 0.8% in the first quarter. The government revised up its estimate of first-quarter growth Friday from 0.5%. Many economists predict growth in the current quarter will approach a solid 3%.

Yellen said a big reason to lift the federal funds rate gradually is that if an abrupt move derailed the recovery, the Fed has few tools to stimulate growth with its benchmark rate still so low.

“We would have limited scope,” she said. She noted that other countries have reduced their key rates below zero, but added that strategy, “is not something we're thinking about now.”

Federal Reserve Chair Janet Yellen is introduced by her predecessor Ben Bernanke, right, during a Radcliffe Day event at Harvard University in Cambridge, Mass., on May 27, 2016.
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