Janet Yellen Defends Rate Hike, Points to Strong Economy

December 17, 2015Monetary Policyby EW News Desk Team

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The job market is strong and Americans are in great economic shape, Federal Reserve Chairwoman Janet Yellen said in a press conference yesterday.

After making a move that will make credit cards, mortgages, student loans, and many other forms of debt more expensive for Americans, Yellen said the move reflects how strong the economy is and how well positioned Americans are to pay more on their debt.

“Americans should realize that the Fed’s decision reflects our confidence in the U.S. economy. We believe we’ve seen substantial improvement in labor market conditions, and while things may be uneven in regions across the country and in different industrial sectors, we see an economy that is on a path of sustainable improvement,” she said.

Economists and analysts had been urging caution in raising interest rates, while others have said an increase in interest rates is necessary to give the Federal Reserve tools to fight the next recession.

A Slow but Strong Recovery

“I think it’s a myth that expansions die of old age.”

“The economy does get hit by shocks, and there are both positive shocks and negative shocks, so there is a significant probability that the economy in a given year will suffer a shock that will put it into recession,” adding that there is perhaps a 10% chance of a recession in the short term.

However, Yellen had high conviction that a recession is unlikely. “I don’t see anything in the underlying strength in the economy that would lead me to be concerned,” she said.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the FOMC said.

Persistent Weak Inflation

In her press conference, Janet Yellen acknowledged that inflation has not reached the Federal Reserve’s target, but dismissed suggestions that inflation could remain low despite the Fed’s projections of a higher rate of rising prices in 2016.

Additionally, Yellen admitted that inflation is on a path towards 2%, and the FOMC is going to look for more evidence of actual increases in inflation before raising the Fed funds rate further. “In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal,” the FOMC said in its public statement.

A Credit Crisis?

In recent days, several high profile stories indicating weakness in the corporate bond market have led some to wonder if the business cycle is reaching the point of a credit crisis. Recently, investment firm Third Avenue announced it was closing a corporate bond fund worth $900 million due to a high demand from investors who want to exit the fund.

Yellen addressed the risks in the high yield market, which recently saw extreme volatility and is now worth trillions of dollars. “Risk spreads in the high yield bond market have been rising since last year, partly reflecting lower oil prices. Redemptions in bond funds have been increasing in recent months,” she said, adding that Third Avenue has been contacted by the Securities and Exchange Commission, which is recommending reforms to its open fund policy.

She also said there would be more opportunities for companies to borrow from banks instead of resorting to the bond market. “We have a more robust economy now and banks with higher capital to enable corporate lending,” Yellen noted.