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Janet Yellen puts a rate hike on the table for this month

Fed Chair Janet Yellen dropped a strong hint Friday that an interest rate hike is on the way later this month.

While leaving just enough wiggle room in case conditions should change, the central bank leader said economic improvements of late will be a big part of the discussion at the March 14-15 Federal Open Market Committee meeting.

"We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect," Yellen said at a speech in Chicago, according to prepared remarks.

"Indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," she added.

Yellen noted that core inflation — excluding volatile food and energy prices — is at 1.7 percent, just below the Fed's 2 percent target, while job creation is growing ahead of the pace needed to sustain the 4.8 percent unemployment rate. She also said global economic risks had receded and believes the Fed is not behind the curve on rates.

Yellen's comments are not likely to come as a surprise to a market that has been bracing this week for a coming Fed move. However, the remarks will confirm a growing feeling, brought on by comments from multiple other policy makers, that another hike is on the way.

Federal Reserve Chair Janet Yellen addresses the Executives Club of Chicago in Chicago, Illinois, U.S., March 3, 2017.
Kamil Krzaczynski | Reuters
Federal Reserve Chair Janet Yellen addresses the Executives Club of Chicago in Chicago, Illinois, U.S., March 3, 2017.

In keeping with how well-telegraphed the move has been, markets reacted little. Stocks were flat on the day while government bonds yields, after an initial jump, receded to levels below where they were before Yellen spoke.

"Chair Yellen confirmed that economic conditions including inflation goals and employment levels have met the Federal Reserve's dual mandate," said Quincy Krosby, market strategist at Prudential Financial. "The March meeting is no longer live — it is alive."

The Fed in December had indicated that three hikes probably would be warranted this year, and Yellen confirmed that sentiment.

That said, just a week ago the market was assigning barely a 1-in-5 chance of a March hike. Just after Yellen began speaking, the probability had moved from nearly 78 percent to about 82 percent, according to the CME's tracking tool of fed funds futures.

Yellen also did make an indirect reference to the current political situation in Washington, in which President Donald Trump has called for expansionary fiscal policy — tax cuts, a rollback of regulations and greater infrastructure spending — to jump start the slowest economic recovery since the Great Depression.

"Fiscal and regulatory policies — which are of course the responsibility of the administration and the Congress — are best suited to address such adverse structural trends," she said.

Looking back, looking ahead

The Fed last raised rates in December 2016, an increase that came a year after its last preceding move and was only the second hike in more than 10 years.

In her speech, Yellen outlined the wavering path the Fed has followed since the financial crisis. The Fed took the target overnight rate to near-zero in late-2008 and followed that up with a bond-buying quantitative easing program that ballooned its balance sheet to $4.5 trillion.

The Fed then stopped QE in 2014, only to find that economic growth, particularly inflation, was below expectations in 2015 and 2016, resulting in a far slower path of rate hikes than anticipated.

However, the current growth indications have central bank officials optimistic again.

"Given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016," Yellen said.

She repeated her cautions that rate hikes will remain gradual in the future, though she added that she and her colleagues do believe that rate hikes "will likely be appropriate in the months and years ahead: Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability."

Watch: Yellen on labor force growth