Yellen Says Interest Rate Hike Could Come Relatively Soon

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Source: Bloomberg

Federal Reserve Chair Janet Yellen signaled the U.S. central bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip and inflation inches higher.

A rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” Yellen said in the text of testimony she is scheduled to deliver Thursday in Washington before Congress’s Joint Economic Committee.

Yellen, who made no mention of the prospective policies of the incoming administration of President-elect Donald Trump, reiterated the expectation of Fed officials that future rate increases will be “gradual.” Bond prices have fallen and stocks have risen as investors anticipate that Trump’s proposals to cut taxes and boost infrastructure and defense spending will lead to faster inflation and stronger growth.

“Yellen’s testimony ignored the very real possibility of substantial fiscal stimulus next year,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note. She “does not want the Fed to become even more of a political punch bag than it is already.”

Read more: http://www.bloomberg.com/news/articles/2016-11-17/yellen-says-fed-interest-rate-hike-could-come-relatively-soon

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1. Translation: We need room to cut rates when the bottom drops out under Trump

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2. Yep. Get some of the pain out of the way up front

so that there will be a floor to put under the economy a year from now.

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3. They can't be zero forever. n/t

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4. People keep saying that but never articulate why not

Why can't they be zero forever? Could they be 2.8 forever? Then why not zero?

[Yavin4]

5. Because at some point, money would lose all value.

When demand is shallow, then it makes sense to spur it along. But, when demand rises, it could lead to catastrophe.

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6. Why would that happen at 0 but not at 2? (nt)

[Yavin4]

7. Raising interest rates means raising the cost of borrowing money

It makes getting money more expensive which slows demand. When the economy has low unemployment, then demand goes up. As demand rises, prices rise in order to meet the demand. At some point prices spiral out of control when money is cheap. We're nearing that point so interest rates have to rise.

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8. Right but you're saying it's "cheap" at zero but not at some arbitrary higher point. Why?

There's no reason rates couldn't be negative, for that matter. Which would make zero look like tight money.

[Yavin4]

9. They could be negative as long as inflation remains low.

However, once inflation spirals upward, then rates have to rise. What the Fed is trying to do (and what they're chartered to do) is get ahead of inflation before the rates spiral out of control.

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10. They've spiraled out of control in the other direction, though

That's the problem. We need some inflation.