Yellen Sees Risk Of Overheating Without Modest Hikes Over Time

The Federal Reserve Chair Janet Yellen said gradual interest rate hike is appropriate policy at a time of high uncertainty about consumer prices.

“It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” she said Tuesday in Cleveland. In addition, she said the Fed “should also be wary of moving too gradually.”

Federal Reserve Chair, Janet Yellen

Speaking of low inflation, Yellen said this year low inflation is probably temporary. “But we recognize that the forces driving inflation are imperfect. Therefore, Fed must adjust outlook when warranted by new economic data.”

Also, she said low inflation likely reflects factors that should fade. Meaning there might be factors subduing prices but not conspicuous just yet. However, “We judge that inflation will stabilize at about 2 percent in few years.”

“There is probability that inflation could be greater than 3 percent or slip below 1 percent next year. It all depends on global oil prices, productivity and global demand.” Another indication of growing U.S. uncertainties and the reason she repeatedly said a change in economic outlook could impact these estimates.

Again, the Fed chair sees stronger wage growth that will eventually boost consumer spending and strengthens business activities in the long-term.

However, she said Federal Reserve should be careful of moving too quickly in order to be able to accommodate shock to the economy per adventure global economic outlook change.

But Fed’s quarterly forecasts published last week and yesterday showed most policy makers are projecting one more rate hike this year and three in 2018.

The odds of the Fed raising rates in December rose from 63 percent on Monday to about 70 percent.

“Yellen sounds resolute in her dismissal of recent inflation weakness as ‘idiosyncratic’ and ‘transitory.’ She is willing to consider alternative explanations, but only hesitantly,” said Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence. “Financial-stability risks are clearly a major motivating factor, as well.”