Yellen Signals That An Interest Rate Hike Could Be Near

Federal Reserve Chairwoman Janet Yellen said she is increasingly confident that the economy is growing sufficiently to achieve labor-market improvement and higher inflation, laying the groundwork for a December interest-rate increase if data hold up. “I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labour market slack, and a rise in inflation to our two percent objective”, she added.

The cost of borrowing from the USA central bank has not gone up since 2006, and has been near zero since 2008, in an effort to stimulate economic activity to help the United States recover from the Great Recession.

Yellen said the neutral interest rate – the one that neither stokes nor slows the economy – seems to have declined in the wake of the financial crisis, and its future path is uncertain.

In fact, her published remarks echoed numerous themes of the Federal Open Market Committee Meeting minutes from the October meeting, including that some committee members would like to raise rates in December, others thought they should wait and the ultimate decision would depend on incoming data.

This could well be the week when the Fed cements its case for a rate hike.

“It’s very important for me to emphasize that there is no such plan” to proceed in such a “mechanical or calendar-based way”, Yellen said. Heading into the October meeting investors were skeptical over whether the Fed would hike rates this year, and had criticized Yellen and the central bank for a series of communications missteps. Translation: unless there is a major hiccup with a bad jobs report on Friday morning, the Fed will probably lift interest rates off their historic lows around 0% when it meets on December 15 and 16.

“If she doesn’t hike, there’s going to be real questions about the Fed’s credibility”, Mark Haefele, global chief investment officer ofUBS Wealth Management, said Wednesday on CNBC.

“A pickup in demand in many advanced economies and a stabilization in commodity prices should, in turn, boost the growth prospects of emerging market economies”, Yellen said. The ADP report topped expectations, with private employers adding 217,000 jobs last month, topping the 192,000 that had analysts had forecast.

Yellen is set to testify to U.S. lawmakers on Thursday. Still, she pointed to recent improvements in the labor market and wages as positive signs.

Fed Governor Lael Brainard, widely viewed as a “dove” on monetary policy, on Monday also emphasized the need for caution in adjusting monetary policy, saying that the economy is more fragile now than before the recession.