Yellen says Gradual rate hikes could strengthen the U.S. Economy

The Federal Reserve Chair, Janet Yellen warns the U.S. central bank to expect a continuous gradual increase in the interest rates. A strong labor market and a strong global economy lifts prices even as she recognizes that inflation have been unexpectedly low.

“My best guess is that these soft reading will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year” Yellen stated on Sunday at the Group of Thirty Annual International Banking Seminar in Washington.

Yellen’s term expires in February and she mentioned that she is to be one of the candidates of President Donald to lead the central bank. She has presided over a sustained recovery from the global financial crisis, even though the inflation rate has been seen below the Fed’s 2% goal, this has policy makers wondering how it happened because this was when the unemployment rate has fallen past its pre-crisis low.

While the Fed chair said that she expects a pickup, she and her colleagues have recognized that this year’s low inflation rate could reflect something more persistent than what is reflected based on their baseline projections.

The Inflation rate for this year was at 1.3% in August after stripping out volatile food and fuel which is way below the Fed’s Target. Inflation rate has been heading in the wrong direction for months, and data that was gathered from the end of the year will be unreliable, because it is greatly affected by the season adjustment issues and price fluctuations wrought by hurricanes that hit the Southern U.S. late this summer.

Meanwhile, Employment rate has went above the official’s expectations as the U.S. jobless rate has fallen by almost 4.2% and was seen at its lowest level since 2001, and the participation rate has shown a stabilization as American come back into the workforce. The wages however have been sluggish but is showing subtle chance of improvement.

If a strong growth and labor market tightness is to be seen in the near future, this would tend to push the chances of an inflation higher and would support the committee’s policy of a gradual tightening through interest-rate increases and a reversal of quantitative easing while officials expect another increase in 2017 and the market pricing shows that investors see the move coming in December.

Central bankers voted last months to begin unwinding their balance sheet, and Yellen said again on Sunday that they do not intend to use that process as an active monetary policy tool. Some Fed Official have cited concerns over the financial stability as another reason to gradually raise the interest rates after the U.S. stock markets reached record highs.

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