Just two weeks before the Federal Open Market Committee’s interest rate meeting, Fed Chairwoman Janet Yellen has all but promised to raise rates from their rock-bottom lows of the past six years.
In testimony before Congress’ Joint Economic Committee Thursday, Yellen said there have been enough signs of economic stability to warrant increasing the Federal Funds rate from its range of 0 to 0.25 percent. The rate has been at that ground level since December 2008.
“The economy has come a long way toward the F.O.M.C.’s objectives of maximum employment and price stability,” Ms. Yellen said. She added in a separate speech, “On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market. Continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2% objective over the medium term.”
The Fed has been looking at indicators like the Labor Department’s recent report that non-farm business inflation-adjusted hourly compensation rose 3.4 percent in the third quarter from last year, one of the largest jumps since the beginning of the Recession. The Labor Department also announced that private-sector hourly earnings increased 2.5 percent in October from the previous year, the biggest leap since July 2009.
Yellen also explained that waiting too long to raise rates may be detrimental to the economy. “Were the [Fed] to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” she said. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”
The most significant headwinds to a rate increase are foreign economic pressures. The European Central Bank announced this week its plans to cut rates and pump up stimulus.
The FOMC will meet again on December 15 and 16 to decide the direction of rates. An increase could affect everything from savings rates to mortgage interest rates.