Yellen: Rate hike 'appropriate relatively soon,' cites dangers in waiting

Yellen on labor market and wage growth
Yellen on labor market and wage growth

Fed Chair Janet Yellen on Thursday made her strongest comments to date in favor for a policy tightening in December, telling Congress an increase could be "appropriate relatively soon."

The head of the U.S. central bank also cited the dangers of waiting too long, which could result in the Fed having to move too quickly in the future, according to remarks she delivered to the Joint Economic Committee of Congress.

Both arguments reflect sentiments that have been expressed by the hawkish minority on the Federal Open Market Committee. Dissenters from the committee's doves have worried that keeping rates so low might force the Fed's hand in the future and cause economic and market disruptions.

"Were the FOMC 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 both of the Committee's longer-run policy goals" on inflation and jobs, Yellen 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 committee's next meeting is Dec. 13-14.

While stating the case for an imminent hike, Yellen also repeated her pledge that subsequent moves will come at a gradual pace. Critics have worried that the Fed has missed opportunities to normalize policy, but Yellen said "the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years."

Yellen's speech came amid heightened anticipation that the Fed will hike its key short-term interest rate target next month for the first time in a year.

The U.S. central bank last hiked in December 2015, which in itself was the first tightening since June 2006. Rates had been anchored near zero since the financial crisis in 2008.

Speculation that the Fed might hold off if Donald Trump won the presidency may prove unfounded. In fact, the billionaire businessman's triumph and the Republican hold on Congress only increased the market's anticipation of a December hike, The probability stands now at nearly 91 percent, according to the CME.

Yellen said the economy is making progress toward the Fed's goals of maximum employment and price stability but still "has a bit more room to run." Inflation is running faster and GDP growth has picked up as well, though business investment remains soft and consumer spending is posting moderate gains.

"With the federal funds rate currently only somewhat below estimates of the neutral rate, the stance of monetary policy is likely moderately accommodative, which is appropriate to foster further progress toward the FOMC's objectives," she said.

She cited persistently low oil prices as one reason for the low levels of business investment. She also said that despite a 4.9 percent unemployment rate that is bumping up against the Fed's standard for full employment, there "appears to be scope for some further improvement in the labor market."