Fed chief Yellen stands by central bank independence

Posted on November 17, 2016

Janet Yellen has stressed the importance of central bank independence in her first public remarks after Donald Trump’s election victory as new data showed the president-elect will inherit a strengthening economy.

The Federal Reserve chair told a congressional hearing on Thursday that an increase in short-term interest rates could “become appropriate relatively soon”, raising expectations of a rise at the Fed’s next meeting in December. New economic figures showed a surge in housing starts and a pick-up in inflation.

Ms Yellen said it was “critically important” that central banks had the freedom to make judgments about how best to pursue their goals. Her remarks followed attacks during the election campaign by Mr Trump, who claimed the Fed had kept interest rates low to help the Obama administration.

“Sometimes central banks need to do things that are not immediately popular for the health of the economy,” she said. “We’ve really seen terrible economic outcomes in countries where central banks have been subject to political pressure.”

The Fed’s next meeting is on December 13-14, five weeks before Mr Trump’s inauguration. Economists said the fresh batch of data showing an improving economy increased the chances of it deciding to raise rates.

Ms Yellen said an “increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives”.

Chris Rupkey, chief financial economist at the bank MUFG, said: “President-elect Trump seems to have hit the jackpot in inheriting an economy that is the strongest, the closest to full employment in years.”

Data released on Thursday showed the biggest rise in US consumer prices in six months in October and a jump in housing starts that took them to a nine-year high. First-time applications for unemployment benefits also tumbled to a 43-year low last week.

In its last statement in November, the Fed said the case for higher rates had strengthened and that it was just waiting for some further signs of improvement before pushing through a second rate increase following last December’s quarter-point move.

Speaking to Congress’s Joint Economic Committee, Ms Yellen said the Fed did not want to wait too long.

“Were the [Federal Open Market Committee] to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting [the] committee’s longer-run policy goals,” she said.

“Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”

The Fed’s view on the strengthening case for a rate increase recognises progress in the labour market together with rising inflation, although it remains below the committee’s 2 per cent objective.

Mr Trump’s remarks on monetary policy had been “somewhat contradictory”, said Carolyn Maloney, a Democratic congressman at the hearing. “He thinks both that the current low interest rates are good for the economy and that the Fed is being political in keeping them at these levels,” she said.

With rising expectations of Mr Trump pushing for a big fiscal stimulus next year, Ms Yellen said the election had created considerable uncertainty over the future path of economic policy.

However, she said the election result had not altered the Fed’s stance on monetary policy for now. “When there is greater clarity about the economic policies that might be put into effect, the [FOMC] will have to factor in those assessments of their impact on employment and inflation and perhaps adjust our outlook,” she said.

Last Friday Stanley Fischer, vice-chair of the Federal Reserve Board, said the Fed would welcome greater fiscal support for the economy amid signs that Mr Trump and the Republican-dominated Congress were preparing for tax cuts and larger budget deficits.

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