WASHINGTON — Federal Reserve Chair Janet Yellen on Sunday sketched a bright outlook for the U.S. economy and for inflation prospects in coming months, saying the impact of the recent hurricanes will likely slow economic growth slightly but only temporarily and should be followed by a rebound by year’s end.
Her comments suggested that the central bank will soon resume raising interest rates to reflect the strengthening economy. Most economists foresee the next rate hike — the third this year — coming in December.
Speaking to an international banking seminar, Yellen acknowledged that the persistence of undesirably low inflation this year has been a surprise. But she said she expected inflation to start picking up as the effects of temporary factors, such as falling prices for consumer cellphone service, begin to fade.
“Economic activity in the United States has been growing moderately so far this year, and the labor market has continued to strengthen,” Yellen said in a speech to a panel that included central bank officials from China, Japan and the European Central Bank.
Of the hurricanes that struck Texas, Florida, Puerto Rico and the Caribbean, Yellen noted that they caused enormous damage. But she added:
“While the effects of the hurricanes on the U.S. economy are quite noticeable in the short term, history suggests that the longer-term effects will be modest and that aggregate economic activity will recover quickly.”
Yellen said that the economy’s growth, as measured by the gross domestic product, might have slowed slightly in the July-September quarter as a consequence of the hurricanes but that growth is likely rebounding in the current quarter.
Central bank decision
The Fed chair’s speech Sunday followed the central bank’s decision at its meeting last month to leave its benchmark short-term rate unchanged in a range of 1 percent to 1.25 percent. At the same time, the Fed announced that it would begin parings its enormous portfolio of bonds, which it had amassed after the 2008 financial crisis in an effort to hold down long-term loan rates for consumers and businesses. The move to let its balance sheet gradually shrink could mean higher rates on mortgages and other loans over time.
During a question period, Yellen was asked whether a booming stock market that some see as overvalued or potentially higher budget deficits resulting from the Trump administration’s tax cut plan had increased economic uncertainty.
Yellen declined to respond specifically but noted that the Fed’s staff has described stock prices as elevated. At the same time, she said market levels should be viewed in the context of a banking system that she called “dramatically improved” since the 2008 financial crisis.
The Fed chair said the administration’s proposed tax cuts may have boosted consumer and business confidence but so far appear to have had little effect on investment or spending. She said the Fed was taking a “wait and see attitude” on how the tax program might affect the economy given the unknowns about it.
Zhou Xiaochuan, head of China’s central bank, said his country is cutting capacity in its steel and cement industries by 10 percent but China requires a sizable output in those areas.
