The Fed Chair’s latest speech signals good times – and maybe higher interest rates.
When Fed Chair Janet Yellen delivers a speech, the significance isn’t just what she says. It’s what the financial media and experts think she said.
Yellen’s speech on Monday at an international banking seminar was well received by all who heard her – and if they’re right about her being right, the economy will continue to grow.
“Economic activity in the United States has been growing moderately so far this year, and the labor market has continued to strengthen,” Yellen told the Group of 30, a gathering of the world’s top financiers and academics. “I expect the labor market to strengthen further as economic growth continues.”
That’s effusive praise from a Fed chair, who traditionally speak in measured tones because they know the financial markets are quite literally hanging on their every word.
Yellen also referenced the weather, expressing sympathy but not lamenting the economy…
The terrible hurricanes that hit Texas, Florida, Puerto Rico, and our neighbors in the Caribbean caused tremendous damage and upended many lives, and our hearts go out to those affected. While the effects of the hurricanes on the U.S. economy are quite noticeable in the short term, history suggests that the longer-term effects will be modest and that aggregate economic activity will recover quickly.
The financial media interpreted Yellen’s comments in two interconnected ways: Things are looking up, and interest rates are probably going up.
CNBC said Yellen “sketched a bright outlook for the U.S. economy” and “suggested that the central bank will soon resume raising interest rates to reflect the strengthening economy.”
The connection between economic growth and interest rates is one of speed: The Federal Reserve prefers the economy to hum along at a reasonable pace, not too fast or slow. When it slammed into reverse during the Great Recession, the Fed slashed its benchmark interest rate to virtually zero, making it cheap for businesses to borrow money — and hopefully spend it hiring employees.
Now that the economy might be accelerating, the Fed might once again raise interest rates to slow things down.
Because Yellen says, “I perceive that risks to global growth have receded somewhat and expect growth to continue to improve over the near term,” financial experts took that as a sign the Fed will raise rates for the fourth time over the past year.
The result isn’t always bad, as CNN explained: “Low rates are bad news for savers, who see virtually no returns on the cash they keep stashed away.” So higher interest rates help those with money, although it’s no friend of those with debt.
What the Fed really wants is reasonable inflation, which might sound odd. But as CNN says…
Economists look to healthy inflation as a sign of economic stability. Ideally, the Fed wants to see about 2 percent annual growth. That’s considered the “Goldilocks” rate for inflation: Not too high, not too low.
Finally, raising interest rates is necessary for another reason: So if the economy reverses again, the Fed can do something about it. As Bloomberg reported, “Another concern for central banks is what to do in the event of another economic slump.” You can’t cut interest rates to stimulate the economy if that rate is already zero.
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Article last modified on October 19, 2017. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Yellen Isn’t Quiet on the Economy - AMP.