Federal Reserve Chairwoman Janet L. Yellen on Tuesday painted a largely upbeat picture of the economy, telling lawmakers that somewhat faster wage growth is in store for workers, even as she signaled that the central bank would consider raising interest rates as early as next month.
Most analysts are not looking for a Fed rate hike until June, and Yellen and her colleagues, at their last policy meeting two weeks ago, gave little indication of an imminent move. Yellen didn’t change her tune Tuesday, but with inflation on a favorable path and the labor market continuing to expand — the economy added a strong 227,000 jobs in January — she left open the possibility of a rate increase when the Fed next meets in mid-March.
The Fed “expects the evolution of the economy to warrant further gradual increases in the federal funds rate,” Yellen told the Senate Banking Committee on the first of two days of hearings, part of congressionally mandated testimony and a report on monetary policy and the economy. Policymakers last lifted their benchmark short-term rate in December, for only the second time since the Great Recession ended in 2009.
At the same time, Yellen reiterated that there is considerable uncertainty in the economic outlook. She cited as sources fiscal policies, productivity growth and developments abroad, although not directly referring to President Trump or his plans for tax reform and other policy changes.
“We recognize that there may be significant economic policy changes and that those changes could affect the outlook. We’re very well aware of that,” Yellen said. “And we don’t yet have enough clarity on what changes will be put in place to really clearly factor those policy changes into the economic outlook .… We will wait to gain greater clarity on policy changes.”
Despite being pressed by lawmakers, she declined to evaluate Trump’s economic initiatives or speculate about what they might mean for the economy. Hopes for fiscal stimulus, particularly tax cuts, but also substantial infrastructure spending as well as a rollback of business regulations, have fueled a surge in stock markets.
Stocks rose Tuesday, with major indexes hitting new highs, despite the possibility of a rate hike as early as next month.
“While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer run economic growth and raising American living standards with policies aimed at improving productivity,” Yellen said, noting in particular education and training to improve workers’ skills.
In answers to lawmakers’ questions, Yellen did weigh in on a couple of Trump’s policy moves, in general. She said, for example, that slowing immigration would tend to slow the economy, as the pace of economic growth is based primarily on changes in labor force and productivity gains.
On the Affordable Care Act, which Trump and many in the GOP want to repeal, Yellen said, “Healthcare … does account for a very significant share of spending, and a loss of access to health insurance could have a significant impact on spending of households for other goods and services, and beyond healthcare itself, have impacts on the economy.”
Some analysts think that the uncertainty hanging over federal programs will keep Fed policymakers on hold until June. “Once the fiscal stimulus is passed, however, we expect the pace of interest rate hikes to increase markedly, with as many as three rate hikes in the second half of this year,” said Paul Ashworth, chief U.S. economist at Capital Economics.
Many investors remain skeptical of a Fed rate hike next month. But Curt Long, chief economist at the National Assn. of Federally-Insured Credit Unions, said that “a strong jobs report in three weeks could tilt expectations toward a move.” The next monthly employment report, for February, will be released a few days before the Fed policy meeting.
Chris Rupkey, chief financial economist at MUFG Union Bank in New York, was more confident about an imminent rate increase after Tuesday’s hearing. Not only did Yellen hint at a rate hike, he said, but the Fed leader also gave a clear indication that she did not want to be behind the curve by moving too slowly.
“There’s the usual disclaimers and hedges, but we think she is raising the curtain for a potential rate hike in March this year,” Rupkey said.
Besides monetary policy, Tuesday’s three-hour hearing also highlighted the Fed’s role as a regulator and the sharp partisan divide on Trump’s nascent moves to scale back the Dodd-Frank rules enacted in response to the financial crisis a decade ago.
Sen. Mike Crapo (R-Idaho), chairman of the Banking Committee, said he was encouraged by Trump’s executive order to review those regulations and their impact on the financial system. Like other Republican lawmakers, he raised concerns that they were hampering lending and economic growth.
“Financial regulation should strike the proper balance between the need for a safe and sound financial system and the need to promote a vibrant, growing economy,” Crapo said in his opening statement.
Sen. Sherrod Brown (D-Ohio), the committee’s ranking Democrat, pushed back on that thinking, saying that “many of my Republican colleagues are dead set on going far beyond reasonable adjustments and seeking to repeal reforms that are key to preventing the next devastating financial crisis.”
Yellen, for her part, said that U.S. banks were now better capitalized, noting that "I believe the financial system is much more resilient than it was.”
Responding to Brown’s question on whether the rules had constrained businesses’ access to finances, Yellen cited a survey from the National Federation of Independent Business, a leading small-business lobbying group. She said only 4% of respondents had reported trouble getting all of the loans they needed.
Sen. Robert Menendez (D-N.J.) asked about the Consumer Financial Protection Bureau, an agency created as part of the Dodd-Frank legislation: “Do you believe that if an independent consumer-focused agency like the CFPB had existed to police mortgage markets prior to the financial crisis that much of the economic damage to working-class families would have been avoided?”
“Well, I do agree that consumer abuses in the mortgage and securitization areas played a key role in the crisis,” Yellen replied. “The Federal Reserve at that time had responsibility for enforcement of these regulations, and in retrospect, I wish the Fed had acted more aggressively and earlier to address those abuses,” she said.
“We’ve certainly learned from the financial crisis that it’s critical to monitor this area and the potential for deceptive practices in consumer lending to create a financial crisis or financial stability issues.”
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