Janet Yellen warns Trump against short-termism

Further US Fed interest rate hikes are coming this year...

Janet Yellen warns Trump against short-termism

Susan Walsh / AP

US Federal Reserve chair Janet Yellen made the case for economic sustainability at her first testimony before US Congress since the election of Donald Trump, and said that the bank would be sticking to its guns and raising interest rates at an upcoming meeting.

Indeed, she argued that a failure to promptly proceed with hikes would leave the Fed playing catch-up, with potentially disastrous consequences.

"Waiting too long to remove accommodation would be unwise," Yellen told the US Senate Banking Committee on Tuesday, and warned that having to quickly lift rates later on could disrupt financial markets and cause a recession.

"At our upcoming meetings," she continued, "the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be inappropriate."

The Fed had revealed in December that three interest rate increases would be made in 2017, though Yellen did not elucidate further on its plans in this regard.

Most analysts, Reuters reports, are expecting the first increase to arrive in June, rather than at the next Fed meeting in March. The Fed has only raised rates twice since the end of the recession.

Hopes for "sustainable trajectory"

While stating that she did not want to weigh in on specific tax and spending proposal from the White House, her words on where she believes the US should be going can be read as a warning to the Trump administration against the short-term gains that come with an extremely protectionist approach.

Yellen said:

"It is too early to know what policy changes will be put in place or how their economic effects will unfold.

"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.

"I would also hope that fiscal policy changes will be consistent with putting US fiscal accounts on a sustainable trajectory."

Overall, she struck a more hawkish note than expected, though she conceded that "as always, considerable uncertainty attends the economic outlook".

Bond yields and the dollar climbed on foot of Yellen's remarks, with long-term US government bonds reversing most of the month's downturn in the 10-year yield. 

US stocks hit new records once again, with the S&P 500 closing Tuesday’s session at 2,337.6.