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Fed's Yellen warns against delaying interest rate hikes, speaks of 'uncertainty' over US fiscal policy


economy

Fed's Yellen warns against delaying interest rate hikes, speaks of 'uncertainty' over US fiscal policy

The financial world has been put on notice by the US central bank to get ready for interest rate rises, but there is still no word on when.

Reporting to the US Senate’s Banking Committee, Federal Reserve Chair Janet Yellen declined to even say whether the cost of borrowing would be put up at its next meeting in March, but other fed officials have spoken of the need for three increases this year.

Yellen did warn about delaying rate hikes: “Waiting too long to remove accommodation would be unwise. At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

Uncertainty

Yellen also spoke of considerable uncertainty over economic policy under the Trump administration: “Among the sources of uncertainty are possible changes in US fiscal and other policies, the future path of productivity growth and developments abroad.”

Staying determinedly neutral Yellen urged a focus on long-term growth and productivity along with “sustainable” government debt: “It’s too early to know which policy changes will be put in place or how their economic affects will unfold, while it’s not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity.”

Trump has been highly critical of Yellen, but cannot remove her from office as the central bank is supposed to be free of political influence.

Financial markets specialist Professor James Angel from Georgetown University explained why: “Often politicians will want central banks to do things that are short term expedient, but long term dangerous for the economy. So, for example, politicians often want central banks to print lots of money, because in the short run printing money is like taking a drink, it feels really good, but if you print too much, you’ll have an awful hangover later.”

Despite much money printing by the US central bank inflation has only recently started to rise; how much it does, and how quickly, is a big factor influencing when the Fed will put up interest rates.

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