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Yellen sees US economy ready for rate hike

Federal Reserve Chair Janet Yellen stoked expectations of a looming rise in the benchmark federal funds rate on Wednesday, saying she expects the US economy will continue to grow strongly.

[WASHINGTON] Federal Reserve Chair Janet Yellen stoked expectations of a looming rise in the benchmark federal funds rate on Wednesday, saying she expects the US economy will continue to grow strongly.

In a Washington speech, Ms Yellen described conditions as nearly ripe for the first rate increase in nine years and said that domestic and international threats to US economic growth had diminished.

Moreover, she warned, after having locked the rate near zero for seven years, waiting too long could pose big risks to the economy and financial markets.

Ms Yellen made no comment on whether the Fed will raise its benchmark federal funds rate at its next meeting on December 15-16.

But in a sign that she is ready for the momentous step, she told the Economic Club of Washington that, after many months of the buildup to a rate increase, when it does happen, it is a day she is "looking forward to." Ms Yellen said she still sees slack in the US jobs market and that inflation remains weak, both issues that have prevented the US central bank from tightening monetary policy throughout this year.

But she believes that a sustained pace of growth over the next few years will take the jobs market toward full employment and spur an eventual uptick in prices, she said.

"I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labour market slack, and a rise in inflation to our two percent objective," she said.

At the same time, even if those goals are not likely to be quickly attained, Ms Yellen warned that putting off a rate raise much longer has its own risks.

If the Fed waits too long, she said, "we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals." "Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession."

Ms Yellen's comments immediately heightened expectations that the Federal Open Market Committee (FOMC), the Fed's policy board which she leads, will decide in its coming meeting to hike the fed funds rate.

The rate has sat at 0-0.25 per cent since December 2008, in an extraordinary effort to bring the US economy back from the Great Recession of 2008-2009.

"Chair Yellen made it pretty clear in her speech... that she believes the conditions for action have been met," said Ian Shepherdson of Pantheon Macroeconomics.

"Yellen supports raising rates in December, and implies support among her FOMC colleagues as long as data do not reveal significant new weakness in the next two weeks," said Chris Low of FTN Financial.

Analysts, though, cautioned that coming economic data, if poorer than expected, could change the mood in the FOMC.

On Tuesday the ISM index for the manufacturing sector showed a contraction in November, the first such setback in three years.

On the other hand, the Fed's Beige Book regional economic survey, released after Ms Yellen spoke, supported her picture of a mostly healthy economy progressing steadily.

The focus is now on the November national employment report on Friday. It is expected to be moderately good, but if it surprises significantly on the downside, it could reverse expectations.

Ms Yellen stressed that though she saw some risks to US growth, they were diminishing. The threat posed by slower global growth, including China's downturn, has lessened since midyear, she said.

Moreover, she said she expected an upturn in US federal and state government spending would support strong growth.

Markets took her speech as favoring a rate increase at the coming FOMC meeting.

The dollar, already having risen sharply in recent weeks, rose slightly against the euro to US$1.0614, and to 123.22 yen.

Short-term bonds, most affected by the fed funds rate, jumped, with the yield on the five-year Treasury note surging from 1.59 per cent to 1.65 per cent.

US stocks headed lower, but the selling was more tied to a 4.6 per cent fall in US oil prices, which sent oil companies sinking.