The US dollar jumped in value as Federal Reserve chair Janet Yellen told Congress a delay in raising interest rates could be “unwise” if the US economy continues to perform well, despite uncertainty around the outlook.
However, Yellen said it was “too early” to know what policies US President Donald Trump’s administration would follow or their potential effect on the Fed’s outlook, while renewing a call for fiscal policy which will boost US productivity.
The rate-setting Federal Open Market Committee (FOMC) “expects the evolution of the economy to warrant further gradual increases in the federal funds rate” as it continues to expand at a “moderate pace,” Yellen said.
However, the “uncertain” prospects for the US economy mean the FOMC was “not on a preset course” of monetary policy tightening, she added. The last consensus of FOMC members published by the Fed implied three interest rate rises over the course of this year.
The Federal Reserve left interest rates on hold at its last meeting at the start of the month, after increasing the target range for its main federal funds rate to 0.5-0.75 per cent in December. Markets are currently pricing in an 18 per cent chance of a hike at the next meeting on 15 March.
Yellen said: “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
The yield on the benchmark US 10-year Treasury rose by over five basis points at the time of writing to briefly break 2.5 per cent as investors anticipated higher interest rates. Yields move inversely to bond prices.
Yellen also pointed to strength in the US economy, saying “labour market conditions continue to strengthen and inflation is moving up to two per cent.”
US unemployment currently stands at 4.8 per cent, while inflation rose to an annual rate of 2.1 per cent in December. Yellen asserted that employment had increased by 16m since hitting its lowest point in 2010.
She said: “The pace of wage growth has picked up relative to its pace of a few years ago, a further indication that the job market is tightening.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “On rates, we think May or June are more likely than March for the next hike, but much depends on the details of the President's upcoming fiscal proposals and the reaction in Congress, which will tell us how likely it is that his plans will be implemented, and when."