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Fed Chair Janet Yellen: The case for another interest rate hike ‘has strengthened in recent months’

Federal Reserve Chairwoman Janet L. Yellen signaled Friday that another small increase in a key interest rate may be nearing.

Federal Reserve Chairwoman Janet L. Yellen signaled Friday that an increase in a key interest rate was on the table at the central bank’s next meeting in September but that a hike was far from a sure thing.

In her first public comments in two months, Yellen said the economy was improving to the point that policymakers soon could nudge up the benchmark federal funds rate for the first time since December.

But she didn’t give a timetable.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in prepared remarks to a central bankers conference in Jackson Hole, Wyo. 

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She noted the U.S. economy continues to expand, “led by solid growth in household spending.” But at the same time, business investment has been “soft” and U.S. exports have been held back by “subdued foreign demand” and the strong dollar, Yellen said.

Still, the labor market has shown recent strength, with the U.S. creating an average of 190,000 net new jobs from May through July, she said.

“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Yellen said.

In saying the Fed expected “moderate” economic growth, “additional strengthening in the labor market” and inflation rising toward the central bank’s annual 2% target, Yellen appeared to be preparing financial markets for a potential rate hike after the central bank’s Sept. 20-21 meeting.

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But as she continually does, Yellen warned that “the economic outlook is uncertain” and the Fed’s monetary policy was not “on a preset course.”

Chris Rupkey, chief financial economist at Mitsubishi UFG Financial Group, said Yellen’s statement “is an old-fashioned signal that they are very likely to raise rates on Sept. 21.”

Other analysts weren’t so sure.

“She was very careful to talk in broad generalities, which gives her the opportunity to keep September on the table,” said Lindsey Piegza, chief economist at brokerage firm Stifel Nicolaus & Co.

But Yellen’s comments “give her enough flexibility that if the data don’t evolve as she expects she can clearly push that off until later in the year or 2017 as needed,” Piegza said.

A widely watched gauge by the CME Group futures exchange put the odds of a 0.25 percentage point increase in September at 24% after the speech. That was up from 21% on Thursday.

The policymaking Federal Open Market Committee held the rate at between 0.25% and 0.5% at its July meeting. 

Fed Vice Chairman Stanley Fischer said Friday that Yellen’s comments were consistent with a potential rate hike in September and another one before the end of the year.

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But he cautioned in a CNBC interview that the Fed’s decision would depend on incoming economic data, such as next Friday’s report on August job growth. That report “will probably weigh in our decision,” Fischer said.

Economists forecast that the economy added a solid 180,000 net new jobs this month, down from a strong 255,000 gain in July, and that the unemployment rate will tick down to 4.8%. Such a report could tilt Fed officials toward a rate increase.

Fed policymakers have been struggling in their attempt to push rock-bottom interest rates closer to normal as the recovery from the Great Recession matures. They’re worried that if rates don’t rise they’ll be left without their best tool — lowering the rate — when the next economic downturn hits.

At the same time, Fed officials don’t want to raise the rate when the economy is still sluggish and potentially help trigger another downturn.

The Fed began lowering the rate from 4.5% in 2006 as the economy slid toward the Great Recession. The rate declined to near zero in 2008 in an unprecedented attempt to stimulate economic growth.

The Fed funds rate remained there for seven years before the central bank nudged it up a quarter of a percentage point in December. At the time, Fed policymakers estimated four similar hikes this year.

But financial market turmoil in January triggered by fears of a global economic slowdown led the Fed to hold off on another rate hike through the winter and early spring.

The Fed appeared to be nearing another hike in June, but held off because of a weak U.S. jobs report and worries about the possible impact on financial markets of the then-pending British vote on whether to leave the European Union.

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When Fed policymakers met in July, most of those fears had been eased as strong job growth returned and financial markets weathered the “Brexit” vote.

The Fed’s monetary policy statement in July contained upbeat language that appeared to open the door to a rate hike as early as its next meeting in September.

Minutes of the meeting released three weeks later showed that some policymakers indicated they were ready for another small rate hike, while other officials wanted to wait until incoming data “provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand.”

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Although job growth has been solid this summer, the overall economy was sluggish the first half of the year. On Friday, the Commerce Department economic growth in the second quarter of the year was a bit slower than earlier estimated.

The economy expanded at a 1.1% annual rate from April through June, a slight downward revision from the initial estimate of 1.2%. Growth in the first quarter was just a 0.8% annual rate, the slowest in two years.

Growth is expected to have rebounded this summer, with the Federal Reserve Bank of Atlanta’s closely watched estimate forecasting the economy is expanding at a 3.4% rate in the third quarter.

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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UPDATES:

9:05 a.m.: This article was updated with comments from Fed Vice Chairman Stanley Fischer and reaction to Yellen’s speech from economists.

This article originally was published at 7:30 a.m.


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