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Janet Yellen: Rates To Rise Soon If Economy Continues Improving
Aspire, Thought Leaders | 03 June 2015
By: Vance Wong
Articles (74) Profile

Janet Yellen expressed her fairly optimistic outlook of the US economy in her most recent address. The US Federal Reserve chairwoman mentioned that interest rates would be raised if the economic improvement continues according to her expectations.

However, Yellen maintained that the US economy would take at least a few years to revert back to a state where interest rates are “normalised” and stable for the long-term. The first initiative to raise rates would happen when she has confidence that core inflation rate will rise to two percent over the medium term.

US Economy Steadily Recovering

Yellen first touched on the US labour market, saying that it is strengthening and unemployment rate declined to 5.4% in April 2015, almost half of that early post-recession. Furthermore, payrolls expanded by more than three million just in 2014. All of which points towards a strengthening of consumer spending and ultimately better business.

Yellen pointed out that as housing prices continue to increase, the mortgage burdens of house owners are slightly lifted. Although credit availability for mortgages improved, it is still difficult for homeowners to apply for mortgages without debt-free credit records. Nevertheless, Yellen feels that such an issue will slowly diminish once core inflation reaches at least two percent.

By now, it is clear that the weakening of the Euro has quite a significant impact on the US economy. The weakening of other major currencies around the world has made things worse as the value of US exports dipped over the past few years. Fortunately, the European government’s efforts have proved to help bring its economy on a “firmer footing”.

With the waning of these headwinds that had been weighing down on the US economy, Yellen feels optimistic towards continued and sustainable growth. Of course, her optimism is not without any worries at all.

Factors Obstructing Growth

While the low oil prices are benefiting consumers in general, energy companies are affected in terms of oversupply and also weaker investments. Despite this negative side of the oil prices fall, Yellen reminded everyone that the US is still a net importer of oil.

As for the housing market, there is no doubt that it has improved significantly since the bust, but new housing projects are not impressive, considering population growth. Many young adults are opting to live with their parents and probably afraid of another housing bubble.

Looking at the financial sector, investments across the market have proved to be weak as many analysts and economists speculate about the uncertainty of economic growth and policies after a weaker-than-expected first quarter.

Many companies are holding on to their cash, possibly waiting on the sidelines for opportunities or just to play it safe. Yellen mentioned that the weak overall investments are probably because the recovery since the recession has been “moderate”.

What These Mean For Monetary Policy

According to Yellen, monetary policies would typically take time for the full effects to set into the economy. As such, she emphasised that monetary policy must be in a “forward-looking manner”.

However, she reiterated her point that she has to see sufficient improvements, especially in the labour market, before the Feds can raise rates. Even then, the raise should be gradual over the medium term.

Yellen remarked that the Federal Reserve’s objectives do not just include employment rates and price stability to achieve a two percent core inflation rate. This has to be supported by productivity growth.

On top of monetary policies, Yellen mentioned about policies to encourage innovation, which would result in more capital investments. It is important to increase growth, but it is more important to sustain economic growth for the longer term.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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