Fed could hike interest rate sooner than expected: Yellen

Tuesday 15 July 2014 16.09
Fed Chair Janet Yellen says while the economy continues to improve, the recovery is not yet complete
Fed Chair Janet Yellen says while the economy continues to improve, the recovery is not yet complete

The Federal Reserve could raise its interest rate sooner than expected as the jobs market improves, Federal Reserve Chair Janet Yellen said, adding the Fed was closely watching for risks. 

Delivering the semi-annual testimony on the US economy and monetary policy to the Senate Banking Committee Ms Yellen said the policy-setting Federal Open Market Committee (FOMC) was closely following developments in the economy to determine the future path of interest rates.

"If the labour market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned," Ms Yellen told the Senate Banking Committee.

But, she said, the future path of interest rates "likely would be more accommodative than currently anticipated" if economic performance is disappointing.

Ms Yellen said the economy was continuing to make headway toward the Fed's dual goals of maximum employment and price stability of around 2.0% inflation.

But, she noted, there was considerable uncertainty surrounding the Fed's projections for economic growth, unemployment, and inflation. 

"FOMC participants currently judge these risks to be nearly balanced but to warrant monitoring in the months ahead," Ms Yellen added. 

After a sharp economic slump in the first quarter, largely due to severe weather, "a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching."

Although inflation has moved up in recent months it remains below the Fed's longer-run target, she said.

The labour market is still showing "significant slack" despite job growth over the first half of the year that is at a "somewhat stronger pace" than in 2013.

The unemployment rate has fallen nearly 1.5 percentage points over the past year and stood at 6.1% in June.

"I and other FOMC participants continue to anticipate that economic activity will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth," Ms Yellen said.

The Federal Reserve Chair told lawmakers that while the economy continues to improve, the recovery was not yet complete, citing still-high unemployment.