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Federal Reserve Chair Janet Yellen
Image: Reuters/A. P. Bernstein

Fed's Yellen sees only 'gradual' rate rises

July 13, 2017

Federal Reserve Chair Janet Yellen has told the US Congress that interest rates will not have to rise much further. Politicians are concerned that three rate rises have taken place amid an uneven economic recovery.


Describing a healthy and steady-growing American economy, Yellen told US lawmakers on Wednesday that "gradual" increases in interest rates would be sufficient.

The head of the US central bank, the Federal Reserve, added that while rates will continue to rise, they would likely remain at historically low levels for some years to come.

The comments were part of Yellen's bi-annual report to Congress, where she faced tough questions from legislators.

Bond wind-down due

The Fed chair also said the central bank would begin winding down its massive bond portfolio before the end of the year, which is worth some $4 trillion (3.51 trillion euros).

She also predicted faster wage and price increases in light of strong hiring, spending and investment in the US economy over the past few months.

The central bank chief also spoke out against proposals that elected officials be given more influence over what are supposed to be independent interest rate decisions by the Fed.

Wall Street Dow Jones
While US stock markets have reached record heights recently, the overall economy has only seen relatively strong growthImage: Reuters/B. McDermid

Yellen spoke as a question mark hangs over her future after rumors circulated that US President Donald Trump was increasingly unlikely to nominate her for a second term next year.

Trump has repeatedly criticized her economic policy as he proposes greater trade barriers and new infrastructure spending as part of his campaign pledge to protect American jobs and fuel growth.

Yellen's replacement?

On Tuesday, the news site Politico cited four people close to the process as saying that National Economic Council Director Gary Cohn, a former Goldman Sachs employee, is the leading candidate to succeed her.

Having kept interest rates at a historically low 0.25 percent for seven years after the financial crisis, Yellen began hiking the key rate last December, and two further increases have followed. Analysts expect a fourth rise before the end of the year.

The Fed has faced criticism for raising interest rates so quickly amid stubbornly low inflation, which currently hovers at 1.4 percent, against the bank's two percent target rate.

Central bank interest rates are used as a lever when inflation rises as an economy begins to boom, to prevent overheating. Rates will then be lowered during recessions.

Missing dynamism

While US stock markets and other assets have boomed since the financial crisis, the real economy has struggled to achieve the same strong recovery seen after previous recessions.

The Fed has targeted a neutral interest rate level that neither encourages nor discourages economic activity, and has remained wary about the effect rate rises would have on relatively fragile growth.

While the economy started the year with a sluggish growth rate of just 1.4 percent, it has regained momentum in recent months, and unemployment is now down to 4.4 percent, nearly a 16-year low.

mm/gsw (AFP, AP, Reuters)

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