Yellen: March rate hike is on the table

Federal Reserve Chair Janet Yellen told Congress Tuesday that an interest rate hike in March remains on the table, pushing back against market expectations that the Fed will stand pat.

“Precisely when we take an action -- March, May or June -- I can’t tell you,” Yellen told the Senate Banking Committee. “I would say every meeting is live.”

Fed fund futures say there’s just an 18% chance of a rate increase in March, versus. about 50% in June. The Fed raised its benchmark rate by a quarter percentage point in December to a range of 0.5% to 0.75%. That was its first hike in a year.

In December, Fed policymakers forecast three rate increases in 2017, up from its estimate of two bumps in September, citing an improving economy and labor market.

San Francisco Fed President John Williams recently suggested a March increase is a possibility. And Chicago Fed chief Charles Evans, typically a “dove” who prefers to keep rates low to spur growth, said he officially predicted two rate hikes but could be comfortable with three moves.

January jobs report crushes expectations: 227,000 added

Yellen also reiterated that Fed policymakers continue to expect gradual rate increases amid a moderately expanding economy and inflation that should slowly rise to the Fed’s annual 2% target.

Fed policymakers generally have not factored Trump’s fiscal stimulus proposals into their economic growth and rate forecasts. Trump has proposed up to $1 trillion to upgrade the nation’s crumbling roads, bridges and waterways, higher defense spending and big tax cuts.

“It looks like (the Fed’s policymaking committee) believes they’re unlikely to happen or thinks they’re not particularly pro-growth,” Sen. Pat Toomey, R-Penn., told Yellen. “The rest of the world has a different view.”

“Most of my colleagues decided they would not speculate on what economic policy changes would be put into effect and what their effect would be,” Yellen responded. 

She added: "While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity,” Yellen added. 

Yellen said investments in research and development and job training would be effective in bolstering weak labor productivity to juice long-term economic growth, though she said infrastructure investment also could help.

She also said she hopes that President Donald Trump’s proposed stimulus will not run up the federal debt.

“I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory,” Yellen told the Senate banking committee. Higher debt is likely to push up long-term interest rates, increasing borrowing costs for consumers and businesses.

Loans are getting harder to come by for some consumers

Separately, lawmakers pressed Yellen on when the Fed plans to reduce its roughly $4 trillion balance sheet. During and after the Great Recession and financial crisis, the Fed purchased well over $3 trillion in mortgage-backed securities and Treasury bonds to push down mortgage rates and long-term interest rates broadly.

Some Fed policymakers recently have said the central bank should begin to unwind those purchases now that it has started raising its benchmark short-term rate. Although Fed officials don’t plan to sell the assets because that might abruptly drive up long-term rates, they’ve said they eventually will stop reinvesting the funds from the securities as they mature, allowing the balance sheet to gradually shrink.

Noting such a move still could push up rates and rattle the economy, she said the Fed plans to take that step “when we have confidence that the economy is on a solid course” and its benchmark rate is high enough that it can be pushed lower to ease economic turbulence.

The hearing, at points, turned into a tribunal for Trump’s plans to roll back the Dodd-Frank financial reform through both executive orders and legislation that Congress would need to approve.

Prodded by Sen. Elizabeth Warren, D-Mass., Yellen noted that only 4% of small businesses in a recent survey said their borrowing needs had not been satisfied. She also said business lending has grown moderately over the past year and jumped 75% since the financial crisis.

Trump to dismantle Dodd-Frank Wall Street rules through executive orders

Sen. Thom Tillis, R-N.C., questioned Yellen’s figures and said some studies show the regulations have crimped business loans. Many small businesses, he said, haven’t even sought a loan because economic growth has been sluggish.

“I think that is true,” Yellen said. “We’ve had a slowly growing economy.”