WASHINGTON — Federal Reserve Chair Janet Yellen on Thursday downplayed the risk of the U.S. falling into recession next year and indicated central bank policymakers are ready to raise a key interest rate this month, in part to give them flexibility to lower it if the economy slows.
“It would be helpful to …give us more scope to be stimulating the economy and responding to adverse shocks if the average level of interest rates were somewhat higher,” Yellen said during a hearing of Congress’ Joint Economic Committee.
The federal funds rate, a key short-term benchmark, has been near zero since December 2008 in an attempt to boost economic growth during the Great Recession and its aftermath.
Based on comments by Yellen and other officials, Fed policymakers are widely expected to nudge the rate up 0.25 percentage points at their Dec. 15-16 meeting.
Yellen reiterated to the committee a comment she made during a speech to the Washington Economic Club on Wednesday that a rate increase “will be a testament … to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.”
“In that sense, it is a day that I expect we all are looking forward to,” she said.
“We are contemplating raising them. But we have said that we expect that process to be gradual,” she said. “And we want to make sure that, having achieved this progress in the labor market, we maintain it and don’t put it in danger.”
But several lawmakers peppered her with worries about the state of the U.S. economy and concerns that the Fed was moving in a direction different from the European Central Bank, which announced new stimulus measures Thursday.
Sen. Dan Coats, R-Ind., the committee’s chairman, asked Yellen whether “coordinated terrorist attacks or just an acceleration of the kind of violence we’re seeing — mass shootings and so forth and so on” — a clear reference to Wednesday’s incident in San Bernardino, Calif. — could have a negative effect on the economy by causing people to hold back on spending or fear going to the mall to shop.
Yellen said the Fed watches those risks “very carefully” and they “have the potential to have a significant economic effect.”
“I would not say that I see a significant effect at this point, although certainly in the aftermath of the financial crisis, we’ve seen rather cautious behavior on the part of households and firms,” she said.
She promised the Fed would be cautious as well given the recent economic trauma.
The process of moving the interest rate up to a more normal level will take place slowly, she said.
Some analysts have predicted the Fed could wait as long as six months after the first 0.25 percentage point increase to enact another one.
But Yellen said Fed policymakers can’t wait too long because there are “well-documented lags in the effect of monetary policy” on the broader economy. And the longer the Fed waits, the faster it might have to raise rates, which could hurt the economy.
“Such an abrupt tightening would risk disrupting financial markets, and perhaps even inadvertently push the economy into a recession,” she said.
But she downplayed the short-term risk of recession in the U.S. Asked about a Citigroup report this week that there was a 65 percent chance the U.S. would fall into recession next year, Yellen pushed back.
“I can’t put a number on the risk of a recession, but I absolutely wouldn’t see it as anything approaching 65 percent,” she said.
