News Column

Interest rates on track to rise

July 16, 2014

By Paul Davidson, @PDavidsonusat, USA TODAY

Federal Reserve Chair Janet Yellen told lawmakers Wednesday the central bank is roughly on track to begin to raising short-term interest rates in the third quarter of 2015.

A separate Fed report, meanwhile, portrayed a gradually improving economy.

The Fed's benchmark short-term rate has been near zero since the 2008 financial crisis, and Fed officials have said they'll start to raise it sometime in 2015.

Yellen has refused to provide a more specific timetable, saying it depends on the progress of an uncertain economy and labor market. But during her testimony before the House Financial Services Committee, Rep. Carolyn Maloney, D-N.Y., noted that economists expect the first rate hike in the third quarter of next year.

Yellen said Fed policymakers project its benchmark rate will be 1% at the end of 2015, according to their median forecast. That indicates the timing of the first rate increase "is in some sense roughly consistent with what you said."

But Yellen added: "There's no mechanical formula and no clear data."

With the economy and labor market improving, the Fed plans an October end to its monthly bond purchases intended to hold down long-term interest rates. Despite a rapid fall in the jobless rate, Yellen has said other labor market indicators, such as the high numbers of long-term unemployed, remain weak.

Some economists say rising inflation and the drop in unemployment will force the Fed to raise short-term rates as early as March.

Much of the hearing featured heated exchanges between Yellen and the sponsors of a bill to require the Fed to base its interest rate policies on specific economic data, such as the inflation rate. The Fed could deviate from the rules, but it would have to explain its reasoning to Congress. The bill is called the Federal Reserve Accountability and Transparency Act, or FRAT Act.

"The Fed just wants to keep its curtains closed," said House Financial Services Committee Chairman Jeb Hensarling, R-Texas.

Yellen said the bill would be "straitjacketing how we would set monetary policy" and subject the Fed to "short-term political influence."

Separately, the Fed said in its "beige book" that the economy continued to expand at a modest to moderate pace over the past six weeks, with consumer spending improving and manufacturing growing solidly. Gains were strongest in tourism and auto sales, which have bolstered the recovery as Americans replace aging vehicles.

Retail sales grew modestly across most of the country, with brisker activity reported in the New York, Dallas and San Francisco regions. New York continued to benefit from catch-up effects following the harsh weather earlier this year..

Meanwhile, the surging auto industry and booming energy sector kept many factories humming.

Housing has been sluggish since late last year and continued to turn in a mixed showing. Low inventories limited sales in the Boston, New York, Atlanta, Kansas City and Dallas regions.

All areas had "slight to moderate employment growth" -- a description that appears at odds with the robust 272,000 average monthly job gains the government reported from April through June.

Wage growth "remained modest outside of some skilled positions," the Fed said. Employers in many regions said they struggled to find skilled workers, including truck drivers and construction workers. That's pushing up wages in some sectors.

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Source: USA Today

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