Yellen says gradual Fed rate hikes needed to prevent overheating

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File photo of former Federal Reserve Board Chairman Janet Yellen speaking during a briefing on March 15, 2017 in Washington, DC. -- AFP

Former Federal Reserve Chair Janet Yellen said higher interest rates will be needed to keep the U.S. economy from overheating, though the pace must be calibrated to allow inflation to rise to the central bank’s 2 percent goal.

“I think the Fed should and has been gradually raising rates to try to stabilize the labor market, to bring down the pace of job growth to a sustainable level to avoid the economy overheating,” Yellen said Monday in Philadelphia.

U.S. employers added a stronger-than-expected 313,000 new jobs in February. Yellen said that a monthly pace of 90,000 to 120,000 was probably sustainable. If it continues at that rate, the jobless level would slowly decline but “I still will not expect to see some dramatic pickup in inflation,” she said. Prices rose by 1.7 percent in the 12 months to January, according to the gauge favored by the Fed.

“There are risks on both sides,” Yellen told an audience at an event hosted by the University of Pennsylvania’s Wharton business school. “Tighten too slowly and the economy could overheat, and tighten too quickly and inflation may not move back to 2 percent,” possibly leading to a problematic fall in inflation expectations.

Yellen left the U.S. central bank early last month after she was passed over for a second term as chair by President Donald Trump, who broke with past practice in appointing Republican Jerome Powell to the post. Powell is expected to continue her policy of gradually raising interest rates by delivering another hike at a meeting this week of the Federal Open Market Committee in Washington.


Yellen has said she was disappointed at not being offered another four years despite overseeing a steady economic recovery.

On Yellen’s watch, unemployment declined to 4.1 percent from 6.7 percent. She resisted calls from more hawkish policy makers and outside economists to begin raising rates earlier. That succeeded in driving unemployment to its lowest since 2000, and without provoking above-target inflation which many of her critics warned would result.

Yellen’s popularity was on display Monday. Boarding Amtrak’s Acela train from Washington she was seen greeting well-wishers. In Philadelphia, a crowd of nearly a thousand, mostly students, packed into an auditorium to hear her discussion with Wharton Professor Jeremy Siegel. — Bloomberg