Washington: The US economy is in decent shape and the Federal Reserve’s decision to raise the benchmark interest rate by 0.25 per cent, the second time in a decade, is a reflection of the confidence over the state of the world’s biggest economy, Fed Chair Janet Yellen said.
Her remarks came as the Federal Reserve increased its key interest rate for the first time in a year.
“In doing so, my colleagues and I are recognising the considerable progress the economy has made towards our dual objectives of maximum employment and price stability. The committee judged that a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and two per cent inflation,” she said.
“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgement that progress will continue,” she added.
This is only for the second time in a decade that the Federal Reserve has raised its rate. The other one was in December 2015.
Asked whether the president-elect Donald Trump’s proposals influenced the decision, Yellen said there was some discussion in that respect.
“Some of the participants but not all of the participants did incorporate some assumptions of the change in fiscal policy into their projections,” she said at her quarterly news conference. “That may have been a factor that was one of several that occasioned these shifts.”
Trump had criticised Yellen on the campaign trail, claiming that she kept interest rates low in order to help the Obama administration. The billionaire-turned-politician plans to grow the economy through a surge in public spending.
Yellen said economic growth has picked up since the middle of the year.
Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth.
Business investment, however, remains soft despite some stabilisation in the energy sector, she said.
“With the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” Yellen said adding that this view is consistent with participants’ projections of appropriate monetary policy.
Responding to questions, Yellen emphasised that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, some of the participants.
“So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants. The unemployment rate is perhaps a touch lower than previously you have seen some modest downward revisions in that – in that projection. For this year, there was a slight upward revision to inflation,” Yellen said.