Federal Reserve Chair Janet Yellen says the central bank shouldn’t wait for 2 percent inflation to continue raising rates, suggesting another rate hike by the end of the year is extremely likely.
Financial markets demonstrated very little reaction to Yellen’s comments to the National Association for Business Economics on Tuesday as investors seem to see another rate hike by the end of the year as a foregone conclusion.
Yellen says she sees “considerable” odds inflation will not settle at or above the Fed’s 2 percent target rate in coming years but warned that the Fed should “be wary of moving too gradually” in raising rates for fear of limiting the central bank’s ability to combat the next economic downturn.
“Sustained low inflation such as this is undesirable because, among other things, it generally leads to low settings of the federal funds rate in normal times, thereby providing less scope to ease monetary policy to fight recessions,” Yellen says.
Yellen also acknowledges that the Fed may have erred in its assumptions about the strength of the labor market and its forecasts for inflation growth. She says she still expects inflation to eventually approach the 2 percent level, but the Fed is now considering the possibility that its underlying assumptions about employment, wage growth and price pressures have missed the mark.
Russell Investments chief investment strategist Erik Ristuben says the Fed is eager to raise rates again before year’s end, but interim inflation data is critical.
“She wants to raise rates, but the inflation data hasn’t supported that case,” Ristuben said on CNBC.
Ristuben says last month’s inflation numbers were the first not to fall short of consensus expectations in the past six months. “If we continue to see that trend, they’re going to raise rates in December,” he said.
Yellen’s call for “a gradual pace of adjustments” certainly didn’t catch investors by surprise. The Standard & Poor’s 500 index barely moved following Yellen’s speech.
However, bond investors see…
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