Federal Reserve Chair Janet Yellen expressed optimism on the economic outlook during a hearing of the House Financial Services Committee on Wednesday, with most of the discussion related to any possible hike in the interest rate and its effects.
The signals most economists were looking for, relate as to if and when the Fed can be expected to hike interest rates and they weren’t let down in this respect. Yellen reiterated the likelihood of an increase in the main interest rate during the course of this year, conditional on its forecasts for stronger growth and an increase in employment coming to fruition.
While offering reassurance to investors who have become used to the near zero rates of the past six years, she said the timing of an increase was far more important than the actual pace of any increases, which she said would be gradual. Yellen said that the first rate increase in such a long period “will signal how much progress the economy has made in healing from the trauma of the financial crisis.”
She added, “We have no judgement at this point about the appropriate date to raise the Federal funds rate. Our judgement about that will depend on unfolding economic developments and how they affect our forecasts.”
In another reference to a rate hike, San Francisco Federal Bank President, John Williams told reporters after addressing the Mesa Chamber of Commerce that, “September could be a very plausible time to start lift off.”
There was very little criticism of the Fed or of its Chair during the hearing with regard to the policy regarding interest rates.
An interesting aside as a result of a question as to whether the U.S. economy contracted during the first quarter, Yellen replied, “According to the statistics we have, yes.” The inference from her reply is that she does believe that the statistic reflecting first quarter growth is accurate. This is a view shared by many economists.
Yellen expressed concern about the levels of student loans and the effect higher interest rates would have on repayments in the future.
She argued however that a stronger economy would offset the increased cost of borrowing.
Interestingly, most senior Fed officials have said that rates would probably remain low for a long time, until the economy is on a firmer footing.