Fed’s Yellen says case for another interest-rate hike has strengthened
By Greg Robb

MARKET WATCH
Published: Aug 26, 2016 10:17 a.m. ET

Federal Reserve Chairwoman Janet Yellen on Friday said the case for another interest rate hike is strengthening, sending a strong signal the U.S. central bank is preparing to increase them as soon as next month.

In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in a speech prepared for delivery to the Jackson Hole summit.

This is a more explicit statement about the near term path of interest rates that many Fed watchers had expected.

Yellen said that the Fed policy committee “continues to anticipate” that gradual increases in the federal funds rate will be appropriate.”

The Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years, Yellen said.

She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.”

The 10-year Treasury note TMUBMUSD10Y, -2.86%  yield rose 1.2 basis points after Yellen’s remarks and the dollar DXY, -0.50%   rallied.

The August jobs report, to be released next Friday, is seen by many as the next hurdle for a rate hike.

Yellen noted that while economic growth has not been rapid the labor market has seen “continued solid performance” with job gains now averaging 190,000 over the past three months.

Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low.

She said that monetary policy will “under most conditions” be able to respond effectively to a downturn. Yellen did not even mention negative interest rates, and said the tools of buying government bonds and forward guidance should work again in the future.

The idea of targeting GDP or lifting the inflation target — suggested in a recent speech by San Francisco Fed President John Williams — were “important subjects for research” but not being “actively considered” at the central bank.

Yellen said Fed officials “may wish to explore the possibility of purchasing a broader range of assets.”

She called on Congress and the executive branch to “explore additional options” for helping to foster a strong economy on the fiscal side, such as improving so-called automatic stabilizers and giving greater support to state and local governments during recessions. Yellen said it also was important to raise productivity growth, which currently has been languishing, through improving education, investing more in worker training, promoting capital investment and research spending and reducing regulatory burdens.