Federal Reserve Chair Janet Yellen gave a relatively upbeat assessment of the economy Thursday, further signaling a likely interest rate hike next month.
But she also noted that there is a great deal of uncertainty following the election and that she expected it would last for some considerable time.
In her first public statements about the economy since Donald Trumps victory last week, Yellen did not talk specifically about the president-elect. Nor did she say that uncertainty, or the risks associated with it, had changed the Feds outlook on the economy or its plan on raising interest rates, at least for now.
With the labor market continuing to make progress and signs of rising inflation and wage gains recently, Yellen said at a congressional hearing that an increase in short-term interest rates could well become appropriate relatively soon.
She said that delaying a rate hike for too long could be detrimental for monetary policy and the economy. The Fed last raised its benchmark rate in December, and it stands at between 0.25 percent and 0.5 percent.
Well, my own judgment is, looking at incoming economic data and developments thus far the evidence we have seen since we (Fed policymakers) met in November is consistent with our expectation of strengthening growth and improving labor market, inflation moving up, she told members of the Joint Economic Committee. So we indicated that the case had strengthened for an increase in the federal funds rate and, to my mind, the evidence weve seen since that time remains consistent with the judgment the committee reached in November.
Analysts widely expect a quarter-point rate increase at the Feds last scheduled meeting of the year, on Dec. 13 and 14. Yellen reiterated Thursday that future rate increases were likely to be gradual, but Trumps election has raised market expectations for faster rate hikes in the months to come.
Like the Fed, private economists are waiting for clarity on how many of Trumps campaign promises will be carried out, particularly the protectionist trade and restrictive immigration policies that Trump has advocated. For now, many businesses and investors are looking for somewhat stronger economic growth in the near term, as well as higher inflation and interest rates, as Trump and the incoming Republican-controlled Congress have raised prospects for sizable tax cuts and investments on infrastructure.
Stocks were up modestly Thursday.
Yellen agreed that markets are anticipating that Congress will push through a package injecting more money into the economy. But the Fed chair also cautioned lawmakers about the inflation and debt implications of such fiscal stimulus. The economy today is operating near full employment, she said, meaning large expansions of fiscal policies could be particularly inflationary.
She added that the longer-run deficit problem needs to be kept in mind. Noting that the ratio of debt to gross domestic product is around 77 percent, she said, theres not a lot of fiscal space should a shock to the economy occur, an adverse shock, that did require fiscal stimulus.
Yellen, asked about statements from Trumps camp to repeal the Dodd-Frank rules enacted after the financial crisis, said that would be a mistake. She said that the law had made the financial system stronger and safer.
We lived through a devastating financial crisis. And a high priority, I think, for all Americans should be that we want to see put in place safeguards through supervision and regulation that result in a safer and sounder financial system, she said, citing the laws tougher requirements for banks and derivatives, among other rules. I think Dodd-Frank was very important in fostering those changes, and we should feel glad that our financial system is now operating on a safer and sounder footing.
Yellen also pushed back on another initiative that is likely to gain impetus under the Trump administration greater scrutiny over the Fed. Over the years, there have been various efforts, led by Republican lawmakers, to audit the Fed or have the central bank follow a set of principles or rules for determining monetary policy. But Yellen and her predecessor, Ben Bernanke, have argued that such legislation would be counterproductive and hurt the independence of the central bank.
There is clear evidence of better outcomes in countries where central banks can take the long view, are not subject to short-term political pressures, she said. And sometimes central banks need to do things that are not immediately popular for the health of the economy. And weve really seen terrible economic outcomes in countries where central banks have been subject to political pressure.
Yellen said that she fully intended to serve out her four-year term as Fed chair, through January 2018. During the campaign, Trump had sharply criticized Yellens performance, indicating he would most likely replace her.