Federal Reserve chairwoman Janet Yellen confirmed Friday that the central bank is leaning toward raising interest rates at its meeting later this month, saying that a rate hike would be “likely be appropriate” if economic data holds up.
Yellen also suggested that the Fed might be more aggressive in tightening monetary policy this year, assuming no new shocks, saying that the pace at which the Fed moves away from ultra-low rates and emergency policies “will not be as slow as it was in 2015 and 2016.”
Picking up the pace is justified, Yellen noted, because the Fed is close to its goals, with unemployment, at 4.8 percent, near as low as Fed officials think it can go and inflation just below their 2 percent target.
“After Fed Chair Yellen’s speech today a rate hike in less than two weeks looks like a done deal,” Nordea Markets economist Johnny Bo Jakobsen wrote in reaction to Yellen’s speech, adding that he predicted three rate hikes this year.
In her remarks, prepared for a delivery to a group of business leaders in Chicago, Yellen also provided a brief history explaining why the Fed only raised rates once in 2015 and once in 2016, after keeping them near zero since 2008. During 2015-2016, Yellen explained, weak growth abroad, especially warning signs from China and Europe, increased demand for U.S. bonds, keeping market-determined rates low. Also, investor expectations of slow future growth pushing down on market interest rates, meaning the Fed had to target lower rates than historically normal.
This week, Fed officials, speaking at different times and different locations, greatly swayed investor expectations for monetary policy. Several of Yellen’s colleagues, including vice chairman Stanley Fischer, who spoke earlier in the day, convinced markets that the central bank is likely to raise its interest rate target at its next meeting, which ends March 15. The major shift in Fed policy, which affected bond and stock markets, came despite a lack of any new major economic indicators, suggesting that the officials’ comments came as a surprise.
Yellen’s comments Friday solidified the perception that a rate hike is imminent, with markets pricing in probabilities over 90 percent that the Fed would raise rates by a quarter percentage point in March. A hike of that size would bring the Fed’s target range for overnight rates to 0.75 percent to 1 percent.
The major datapoint before the meeting will be the February jobs report, which the Labor Department will publish on Friday.
