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Fed Poised to Raise Interest Rates

The Federal Reserve may be raising interest rates soon due to an improving economy, according to Chairwoman Janet Yellen. In a testimony before Congress’ Joint Economic Committee last Thursday, Yellen said a rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives.”

Yellen’s comments support expectations that an increase in interest rates will happen when the Federal Open Market Committee (FOMC) gathers in Washington in December.

Yellen also stated that Donald Trump winning the U.S. presidential election hadn’t changed the central bank’s assessment that a rate increase was needed. She added that she expects economic growth will continue at a pace that’s satisfactory enough to result in further strengthening of the labor market as well as inflation’s return to the FOMC’s objective of 2% over the next two years.

“In addition,” she said, “global economic growth should firm, supported by accommodative monetary policies abroad.”

Yellen added that the Fed will watch how Congress handles the Trump administration’s economic policies and will update its economic outlook accordingly: “Things could turn out very differently, we understand, and we will simply watch what decisions are made and factor them into our thinking going forward.”

At their most recent meeting earlier in November, Fed officials left the target range for the benchmark federal funds rate at 0.25% to 0.5%, where it’s remained since December of 2015. However, Fed officials said they only needed “some” further evidence of an improving economy before raising rates again.

The U.S. economy increased at a 2.9% annual rate in the third quarter, its fastest pace of growth for the gross domestic product (GDP) since the third quarter of 2014. Retail sales increased 0.8% from September to October, a 4.3% rise compared to a year ago, marking the strongest two-month stretch of sales in at least two years. Wages rose 2.8% in October, the fastest annual pace since June 2009, and employers continued to add jobs while unemployment claims fell to their lowest levels in over four decades.

Yellen also warned of the risks of waiting too long before raising rates, stating that, in the event that the FOMC were to put off increases in the federal funds rate, it may have to quickly tighten policy to prevent the economy from overrunning longer-run goals. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability,” said Yellen.

The Federal Reserve meets for the final time this year on December 13 and 14, which will include a Summary of Economic Projections and a press conference with Yellen.