If you haven’t come to accept the notion that the zero interest rate policy of free money is coming to an end, please understand that a rate hike now looks like it is coming much sooner rather than later. Whether that rate hike comes in December or right after the first of the year may be immaterial. Janet Yellen and her fellow Federal Reserve presidents have dropped endless hints about the strength of the economy and on monetary policy.
Yellen spoke at the Economic Club of Washington on Wednesday, signaling that the case for a rate hike is here. Now she has given testimony before the Joint Economic Committee at the U.S. Congress in Washington, D.C.
Yellen’s stance is that the economy has recovered substantially since the Great Recession. The unemployment rate has now declined to 5% and is near the median of the Fed’s longer-run normal level. Another issue is that the inflation-adjusted gross domestic product (GDP) has increased at a moderate pace during the expansion.
One issue keeping the growth down has been weak net exports at a time that foreign economic growth has slowed. Another drag is the strong U.S. dollar.
Strengths were seen in total real private domestic final purchases gaining at about 3% this year — significantly faster than real GDP. Household spending growth and auto buying has been particularly solid, while job growth has bolstered household income. Lower energy prices have bolstered available spending cash, gains have been seen in home values and stock market prices and reductions in debt have all pushed up the net worth of households.
While inflation continues to run below the FOMC’s longer-run objective of 2%, it largely reflects the sharp fall in crude oil prices since the summer of 2014. Yellen anticipates continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment and a rise in inflation to the Fed’s 2% objective. Yellen also sees the risks to the Fed’s outlook for economic activity and the labor market as very close to balanced.
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The conclusion statement showed just how close the rate hike is:
When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.
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