Fed's Yellen says rate hike coming; fiscal policy adds uncertainty

[WASHINGTON] US Federal Reserve Chair Janet Yellen made it clear on Tuesday that interest rate hikes are coming, and could happen at any time.

It was the signal analysts were looking for to confirm their belief the next increase in the benchmark rate could come as soon as the March 14-15 meeting, even though her comments mostly echoed what she has said multiple times before.

At the same time Ms Yellen weighed into the debate over spending plans and tax cuts promised by President Donald Trump, as well as potential immigration limits, cautioning about measures that could bust the budget or slow economic growth.

While treading carefully and not commenting on specific policies - of which there are few in any case - Ms Yellen responded to a question with a warning that US fiscal outlook has been "a long standing problem".

With an aging population and rising health care costs, the budget is "already not sustainable," she told the Senate Banking Committee in the first day of her semi-annual testimony, her first since Mr Trump took office.

"Some of the policies that are being discussed might well raise deficits and... may also have impacts on economic growth."

However, there simply is not enough "clarity" on the policies, and the impact on the economy will depend on their "timing and composition".

Ms Yellen did not elaborate on the kinds of policies she would like to see, but the Fed frequently has stressed that sluggish economic growth is partly the result of the small increases in productivity in recent years, and has encouraged spending on projects focused on that.

The fear is that pumping money into an economy near full employment will ignite inflation, unless the policies are geared toward improving productive capacity, for example through improved infrastructure such as roads, ports and airports.

Inflation is the Fed's primary enemy and policies that set off a spending spree in the economy risk pushing the central bank to raise interest rates faster.

Although Mr Trump criticised the Fed during the campaign for keeping rates near zero to help then-president Barack Obama, he is unlikely to look favourably on higher rates that would crimp economic growth and investment.

Ms Yellen warned that curbing immigration could slow already sluggish US economic growth.

Immigrants help increase the pool of available workers in the US labour force as older workers age out, which is key to increasing slow growth and the "depressingly slow" productivity growth, she said.

"So slowing the pace of immigration probably would slow the growth rate of the economy."

Mr Trump's immigration policies have included an order barring entry to nationals from seven Muslim-majority countries, since blocked by the courts, as well as nationwide raids to scoop up and deport illegal immigrants with criminal records.

Ms Yellen presented an upbeat view of the economy, with labour market conditions continuing to improve and inflation slowly inching up to the Fed's two per cent target. She confirmed the next rate increase could come at any time.

If those factors continue to improve as expected, "it probably will be appropriate to raise interest rates further," she said.

Ms Yellen said she could not be specific on the timing, but "every meeting is live" - a signal analysts were looking for, as many have raised the chances for a rate increase at next month's policy meeting.

The Fed's policy-setting Federal Open Market Committee raised rates in December for only the second time in a decade, a year after its first post-crisis increase, but kept rates steady in January.

Next month's meeting will be followed by Ms Yellen's quarterly press conference, which heightens the anticipation for a policy move.

But her testimony featured mostly familiar statements, including repeating that "monetary policy is not on a preset course," and decisions will be made "in response to changes to the economic outlook and associated risks as informed by the economic data".

Ms Yellen also said, as she has before, that waiting too long to raise rates would be "unwise", as it might force the central bank to increase them more quickly later.

She noted that job gains averaged 190,000 a month in the second half of 2016, wage growth has picked up, and the unemployment rate is at 4.8 per cent.

At the same time, the personal consumption expenditures index - the inflation measure the Fed watches closely - rose to 1.6 per cent in December, still low but heading in the right direction.

AFP