Federal Rates

Federal Reserve Chairman Upbeat on Economy, Signals Likely Rate Hike

Federal Reserve Chair Janet Yellen on Sunday sketched a bright outlook for the U.S. economy and for inflation prospects in coming months, saying the impact of the recent hurricanes will likely slow economic growth slightly but only temporarily and should be followed by a rebound by year's end.

Speaking to an international banking seminar, Yellen acknowledged that the persistence of undesirably low inflation this year has been a surprise. But she said she expected inflation to start picking up as the effects of temporary factors, such as falling prices for consumer cellphone service, begin to fade.

The Fed chair's comments suggested that the central bank will soon resume raising interest rates to reflect the strengthening economy. Most economists foresee the next rate hike – the third this year – coming in December.

"Economic activity in the United States has been growing moderately so far this year, and the labor market has continued to strengthen," Yellen said in a speech to a panel that included central bank officials from China, Japan and the European Central Bank.

Of the hurricanes that struck Texas, Florida, Puerto Rico and the Caribbean, Yellen noted that they caused enormous damage. But she added:

"While the effects of the hurricanes on the U.S. economy are quite noticeable in the short term, history suggests that the longer-term effects will be modest and that aggregate economic activity will recover quickly."

Yellen said that the economy's growth, as measured by the gross domestic product, might have slowed slightly in the July-September quarter as a consequence of the hurricanes but that growth is likely rebounding in the current quarter.

The Fed chair's speech Sunday followed the central bank's decision at its meeting last month to leave its benchmark short-term rate unchanged in a range of 1 percent to 1.25 percent. At the same time, the Fed announced that it would begin paring its enormous portfolio of bonds, which it had amassed after the 2008 financial crisis in an effort to hold down long-term loan rates for consumers and businesses. The move to let its balance sheet gradually shrink could mean higher rates on mortgages and other loans over time.

During a question period, Yellen was asked whether a booming stock market that some see as overvalued or potentially higher budget deficits resulting from the Trump administration's tax cut plan had increased economic uncertainty.

Yellen declined to respond specifically but noted that the Fed's staff has described stock prices as elevated. At the same time, she said market levels should be viewed in the context of a banking system that she called "dramatically improved" since the 2008 financial crisis.

The Fed chair said the administration's proposed tax cuts may have boosted consumer and business confidence but so far appear to have had little effect on investment or spending decisions. She said the Fed was taking a "wait and see attitude" on how the tax program might affect the economy given the many unknowns about what it might look like when the plan emerges from Congress.

In his presentation, Zhou Xiaochuan, head of China's central bank, said that his country is trying to cut excess capacity in its steel and cement industries by 10 percent but that China requires a sizable output in those areas to support an infrastructure construction program. The Trump administration has been pushing China to reduce production in such areas as steel, saying its overcapacity has depressed global prices for steel and hurt American producers.

Haruhiko Kuroda, head of the Bank of Japan, said that his country's economy was expanding moderately and that heightened global political risks so far haven't destabilized financial markets. He did not say what risks he was referring to, but investors have been focusing on the standoff with North Korea over its increased missile tests and development of nuclear weapons.

The officials spoke before the Group of 30, an international body of bankers and academics. Gary Cohn, who leads President Donald Trump's National Economic Council, spoke on a separate panel about the administration's efforts to scale back some of the tighter rules imposed on the U.S. financial sector after the 2008 crisis. In particular, he reiterated that the administration supported easing restrictions on smaller banks.

Yellen's appearance Sunday came as her future at the central bank is in doubt, with her four-year term as chair ending in February. Trump has been considering several candidates for the post, in addition to the possibility of offering Yellen a second term. The other candidates include Jerome Powell, a member of the Fed's board; Kevin Warsh, a former member of the board; John Taylor, a Stanford University economist; and Cohn.

Last week, administration officials said Trump is likely to announce his decision with a month.

Two Fed. Moves Will Push Mortgage Rates Higher

Interest rate hikes indirectly affect long-term mortgage rates – but a separate Federal Reserve move later this year could also push rates higher once it starts selling Treasury securities or mortgage bonds that the Fed bought during the recession to help ease the housing crisis.

Federal Reserve officials are currently zeroing in on a strategy to begin shrinking their $4.5 trillion portfolio of mortgage and Treasury securities, and a plan, once in place, could possibly begin later this year.

Under the emerging strategy, the Fed would raise short-term interest rates two more times in 2017 and then potentially pause. During a rate-increase hiatus, the Fed could then start winding down their portfolio of securities in a gradual and measured way, assessing how the markets handle the move as it does so. In 2018, if all goes well, the Fed could then resume its policy of slowing raising short-term interest rates, according to interviews and recent public statements from officials.

The strategy depends on whether the economy keeps performing as expected, and it depends on whether Fed Chairwoman Janet Yellen can build a consensus among policy makers about how to proceed. No firm decisions have been made yet.

Fed officials held a discussion on the balance sheet at their March policy meeting. Staff economists have started work on a paper to help forge consensus over the many technical details that have yet to be sorted out, including whether to slow reinvestment in Treasurys and mortgage bonds simultaneously or reduce the holdings of one before the other.

Fed Raises Interest Rates 1/4 Point as Expected

The Federal Reserve has raised its benchmark interest rate for the second time in three months and signaled that any further hikes this year will be gradual. The move reflects a consistently solid U.S. economy and will likely mean higher rates on some consumer and business loans.

The Fed's key short-term rate is rising by a quarter-point to a still-low range of 0.75 percent to 1 percent. The central bank said in a statement that a strengthening job market and rising prices had moved it closer to its targets for employment and inflation.

The message the Fed sent Wednesday is that nearly eight years after the Great Recession ended, the economy no longer needs the support of ultra-low borrowing rates and is healthy enough to withstand steadily tighter credit.

The decision was approved on a 9-1 vote, with Neel Kashkari, the head of the Fed's regional bank in Minneapolis, the dissenting vote. The statement said Kashkari preferred to leave rates unchanged.

The Fed's forecast for future hikes, drawn from the views of 17 officials, still projects that it will raise rates three times this year, unchanged from the last forecast in December. But the number of Fed officials who think three rate hikes will be appropriate rose from six to nine.

The central bank's outlook for the economy changed little, with officials expecting economic growth of 2.1 percent this year and next year before slipping to 1.9 percent in 2019. Those forecasts are far below the 4 percent growth that President Donald Trump has said he can produce with his economic program.

In recent weeks, investors had seemed unfazed by the possibility that the Fed would raise rates several times in the coming months. Instead, Wall Street has been sustaining a stock market rally that began with President Donald Trump's election in November, buoyed by the prospect that tax cuts, an easing of regulations and higher spending for infrastructure will accelerate growth.

A robust February jobs report – 235,000 added jobs, solid pay gains and a dip in the unemployment rate to 4.7 percent – added to the perception that the economy appears fundamentally strong.

That the Fed is no longer unsettling investors with the signal of a forthcoming rate increase marks quite a change from the anxiety that prevailed after 2008, when the central bank cut its key rate to a record low and kept it there for seven years. During those years, any slight shift in sentiment about when the Fed might begin raising rates – a step that would lead eventually to higher loan rates for consumers and businesses – was enough to move global markets.

In 2013, then-Chairman Ben Bernanke sent markets into a panic merely by mentioning that the Fed was contemplating slowing the pace of its bond purchases, which it was using then to keep long-term borrowing rates low.

But now, the economy is widely considered sturdy enough to handle modestly higher loan rates. Inflation, which had stayed undesirably low for years, is edging near the 2 percent annual rate that the Fed views as optimal.

And while the broadest gauge of the economy's health – the gross domestic product – remains well below levels associated with a healthy economy, many analysts say they're optimistic that Trump's proposed tax cuts, infrastructure spending increases and deregulation may accelerate growth. Those proposals have lifted the confidence of business executives and offset concerns that investors might otherwise have had about the effects of Fed rate increases.

Yet for the same reason, some caution that if Trump's program fails to survive Congress intact, concerns will arise that the president's plans won't deliver much economic punch. Investors may start to fret about how steadily higher Fed rates will raise the cost of borrowing and slow spending by consumers and businesses.

The Fed typically raises rates to prevent an economy from overheating and inflation from rising too high. But throughout the Fed's history, its efforts to control inflation have sometimes gone too far – slowing borrowing and spending so much as to trigger a recession. Already, the current expansion, which officially began in 2009, is the third-longest in the post-World War II period.

The Fed's benchmark rate, after modest increases in December 2015 and December 2016 and again on Wednesday, is still quite low by historical standards. But if the Fed ends up raising rates three or four times this year and follows up with three additional hikes in 2018, its benchmark rate would be left at a level that might start to dampen economic activity.

Federal Rate Hike Almost a Sure Thing

U.S. employers added a robust 235,000 jobs in February and raised pay at a healthy pace, making it all but certain that the Federal Reserve will raise short-term interest rates next week.

Friday's jobs report from the government made clear that the economy remains on solid footing nearly eight years after the Great Recession ended.

The unemployment rate dipped to a low 4.7 percent from 4.8 percent, the Labor Department said. More people began looking for jobs in February, a sign of confidence that raised the proportion of Americans working or seeking work to the highest level in nearly a year.

The gains in hiring and pay, along with higher consumer and business confidence since the November election, could lift spending and investment in coming months and accelerate economic growth. Americans are buying homes at a solid pace, and manufacturing is rebounding, in part because of improving economies overseas.

The February jobs data likely provides the final piece of evidence the Fed needs to feel confident enough to resume raising rates. A rate increase at the Fed's meeting next week would mark its third hike in 15 months, a reflection of how far the economy has come since the recession ended.

Average hourly pay rose 2.8 percent year over year in February, a decent gain though slightly below historical averages. In a healthy economy, wages typically rise at a roughly 3.5 percent annual pace.

Last month's hiring was boosted by 58,000 additional construction jobs, the most in nearly a decade. That figure was likely enhanced by unseasonably warm weather in much of the nation.

Friday's report was the first to cover a full month under President Donald Trump. During the presidential campaign, Trump had cast doubt on the validity of the government's jobs data, calling the unemployment rate a "hoax." But just minutes after Friday's report was released at 8:30 a.m. Eastern time, Trump retweeted a news report touting the job growth.

An array of evidence suggests that the U.S. job market is fundamentally healthy or nearly so. Hiring over the past two months has averaged 237,000, up from last year's monthly average of 187,000.

The number of people seeking first-time unemployment benefits – a rough proxy for the pace of layoffs – reached a 44-year low two weeks ago.

Business confidence has risen since the presidential election, with many business executives saying they expect faster economic growth to result from Trump's promised tax cuts, deregulation and infrastructure spending.

The U.S. economy is also benefiting from steadier economies overseas. Growth is picking up or stabilizing in most European countries as well as in China and Japan.

The 19-nation alliance that uses the euro currency expanded 1.7 percent in 2016, an improvement from years of recession and anemic growth. Germany's unemployment rate has fallen to 3.9 percent, although in crisis-stricken Greece, unemployment remains a painful 23 percent.

In the United States, employers have been hiring solidly for so long that in some industries, they're being compelled to raise pay. Hourly wages for the typical worker rose 3.1 percent in 2016, according to a report this week by the Economic Policy Institute. That's much higher than the 0.3 percent average annual pay gain, adjusted for inflation, since 2007, the EPI said.

Minimum wage increases last year in 17 states and Washington, D.C., helped raise pay among the lowest-paid workers, the EPI found. Pay increases for the poorest 10 percent of workers were more than twice as high in states where the minimum wage rose as in states where it did not.

At the start of 2017, minimum wages rose again in 19 states, a trend that might have helped raise pay last month.

U.S. builders are breaking ground on more homes, and factory production has recovered from an 18-month slump, fueling growth and hiring. In February, manufacturing expanded at the fastest pace in more than two years, according to a trade group. Businesses have stepped up their purchases of industrial equipment, steel and other metals, and computers.

And in January, Americans bought homes at the fastest pace in a decade despite higher mortgage rates. That demand has spurred a 10.5 percent increase in home construction in the past 12 months.