Federal Reserve Chair Janet Yellen said the ongoing improvement in the U.S. economy would warrant another interest rate increase “in the coming months,” stopping short of giving an explicit hint that the central bank would act in June.
“It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.”
Yellen will host her colleagues on the Federal Open Market Committee in Washington June 14-15, when they will contemplate a second interest-rate increase following seven years of near-zero borrowing costs that ended when they hiked in December. A series of speeches by Fed officials and the release of the minutes to their April policy meeting have heightened investor expectations for another tightening move either next month or in July.
“The economy is continuing to improve,” she said in a discussion with Harvard economics professor Gregory Mankiw. She added that she expects “inflation will move up over the next couple of years to our 2 percent objective,” provided headwinds holding down price pressures, including energy prices and a stronger dollar, stabilize alongside an improving labor market.
Several regional Fed presidents, ranging from Boston Fed President Eric Rosengren to San Francisco’s John Williams, have in recent weeks urged financial market participants to take more seriously the chances of a rate hike in the next two months, pointing to continued signs of steady if unspectacular growth in the U.S. economy and the waning of risks posed by global economic and financial conditions.
Left scale – hourly earnings; right scale – unemployment
“It sounds like the committee is close to a rate hike, assuming the data hold up, but that no decisions have been made about the precise timing,” Laura Rosner, a senior U.S. economist at BNP Paribas in New York, said in an e-mail. “It will be a collective decision.”
The U.S. labor market has continued to expand even as the jobless rate has declined to 5 percent, which many economists consider to be close to or at full employment. Inflation and wages have also shown signs of edging up, a trend the Fed has longed for but is anxious to keep under control. The May employment report will be released on June 3, three days before Yellen is scheduled to speak publicly again, this time in Philadelphia.
More than incoming economic data, market sentiment over the June meeting has been shifted by FOMC member comments and by the April meeting minutes. Those records, released May 18, showed a majority on the committee favored a June rate increase if the economy continued to improve.
Odds of a June rate hike implied by pricing in federal funds futures contracts were 32 percent following her remarks compared to 28 percent earlier on Friday and about 4 percent two weeks ago.
The FOMC accompanied its December rate hike with projections showing officials expected to raise rates four more times in 2016. Amid renewed worries over global growth and a bout of turmoil in financial markets in January and February, the committee has since held rates steady and cut its median projection for the number of 2016 quarter-point rate increases to two.
Yellen, 69, accepted the Radcliffe Medal, an award given annually by Harvard’s Radcliffe Institute for Advanced Studies to “an individual who has had a transformative impact on society,” according to its website. Supreme Court Justice Ruth Bader Ginsburg received the award in 2015.