The U.S. Fed has raised the target overnight interest rate by 25 basis points. This is the 2nd time the Fed has raised it in three months. The U.S. Fed believes that the U.S. economy is steadily growing and that this is evidenced by strong job gains and an increasing inflation rate that is within the Fed’s target of 2%.
The move represents a normalizing of the Fed’s monetary policy. Yellen said that the Fed was willing to allow inflation to temporarily overshoot its 2% target. It also intends to keep its monetary policy accommodative for “some time.” Core inflation remains below 2% in January. The Fed’s forecast for the core inflation at the end of 2017 is at 1.9%.
Fed Chair Yellen said in a press conference, “We have seen the economy progress over the last several months in exactly the way we anticipated. We have some confidence in the path the economy is on.”
For the past three months, there has been an average of 209,000 job gains. The unemployment rate is at 4.7%. This is the level the U.S. considers as full employment.
The Fed is looking to increase rates two more times this year and three more in 2018. Yellen reiterated that future rate increases would be “gradual.” She expects that it will only be at the end of 2019 that rates would return to a neutral level.
The Fed also notes that business investment has now firmed up. However, labor groups urge the Fed to raise the rates slowly so that hiring and wage increases can continue to materialize. Investor and business confidence has increased due to Trump’s vow of cutting taxes, boosting infrastructure spending and easing regulations.
Yellen remains optimistic but sober about the state of the U.S. economy. She says that the economic data does not show any signs that the economy is heating up rapidly and that the economy has “more room to run.” She noted that despite the increase in business and consumer confidence, it has not translated to any significant increase in investment and spending. This suggests that there is no hurry to tighten monetary policy.
Yellen said, “It is uncertain just how much sentiment impacts spending decisions, and I would not say at this point that I have seen hard evidence of any change in spending decisions. Most of the business people that we have talked to also have a wait-and-see attitude.”
The Fed is waiting for more concrete economic plans to arise from the Trump administration. Only then will the Fed adapt their monetary policy in response. Yellen said, “There is great uncertainty about the timing, size and the character of policy changes that may be put in place. I do not think that is a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”
Some analysts believe that the Fed is going to collide with the economic policies of the Trump administration, but Yellen disputed that idea. The Fed chair says, “We would welcome stronger economic growth in the context of price stability.”