Federal Reserve Chair, Janet Yellen, provided an upbeat assessment of the US economy in her semi-annual testimony before the Committee on Financial Services in the US House of Representatives on Wednesday. There were no surprises in the speech as much of the outlook was unchanged from that provided in the Fed’s June meeting minutes.
Yellen said that the pace of economic growth should be moderate in the second quarter, mostly due to higher consumer spending and a recovering housing market. She cited weak overseas demand and a stronger dollar as factors holding down growth. But, despite uncertainties from the situations in Greece and China, she noted that global economic growth could pick up more quickly than anticipated. The outlook for the rest of the year is for economic activity to continue to strengthen.
The labor market has continued to show signs of improvement with the number of long-term unemployed and part-time workers seeking full-time jobs declining significantly. However, wage growth remains subdued and there is still some slack in the labor market, suggesting that current conditions are not yet consistent with full employment.
With regards to inflation, Yellen said that although inflation is currently running well below the Fed’s 2% target, the negative effects on inflation from low energy prices and falling import prices are likely to be transitory. Once these factors dissipate and as the jobs market strengthens further, inflation should move back towards its 2% objective in the medium term.
Yellen also spoke about transparency following criticism from some House of Representative members on the lack of accountability and lack of forward guidance on rates. But Yellen defended the Fed’s record and existing set of rules.
During the questions and answers session, Yellen had to resist pressure from some lawmakers to hold off from raising rates until early 2016. In response, Yellen said that raising rates earlier would allow for a more gradual path of rate increases than raising them later. Nevertheless, she gave no dates for when the first move would come saying “Our judgment about this will depend on the unfolding economic developments and how they affect our forecasts”.
Most economists still expect the first increase to come in September, though futures markets do not anticipate a move until early 2016. As the focus has now shifted to data, the Fed could judge that the right conditions have been met to warrant a rate increase at any one of its regular meetings in the coming months.
The dollar continued to benefit from Yellen’s comments on Thursday as the dollar index briefly rose above 97.60 for the first time since April. Both the euro and the pound were trading near day lows in mid-European session at 1.0888 and 1.5614 respectively. Against the yen, the dollar broke the 124 handle, trading just above it, while against the Swiss Franc, it reached a 2.5-month high of 0.9569.
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