Federal Reserve Chair Janet Yellen offered an upbeat assessment of the state of the U.S. economy on Wednesday, but warned that monetary policymakers will be operating under a “cloud of uncertainty” until there is more clarity about the economic and fiscal policies of incoming President Donald Trump.
“As many observers have noted, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is far too early to know how these policies will unfold,” Yellen said in a nearly hour-long press conference. “Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy.”
Yellen’s remarks came after a two-day meeting of the Federal Open Markets Committee, which sets the Fed’s target interest rate. The FOMC voted to raise that rate from 0.5 percent to 0.75 percent, the first increase in a year and one that was widely expected by the financial markets.
The unanimous vote to raise interest rates, she said, “should certainly be understood as a reflection of the confidence we have...and our judgment that that progress will continue. It is a vote of confidence in the economy.”
She added, “My colleagues and I have judged the course of the U.S. economy to be strong.”
In her prepared remarks, Yellen said that the economy has made “considerable progress” toward “maximum employment and price stability.” She added that, in general, she and her colleagues “expect the economy will continue to perform well.”
Yet in its statement about the decision, the FOMC went to some lengths to indicate that the trajectory of interest rates over the future will be an upward one, but that the slope will not be steep, meaning that rates are likely to stay at historically low levels for at least a few more years.
Just how quickly the Fed moves to raise rates in 2017 and beyond will depend, at least to some extent, on the fiscal policies enacted by the incoming Trump administration and Congress. Yellen was asked to respond to reports that the Trump administration will work to pass a major stimulus package early next year, likely in the form of infrastructure spending. Trump has repeatedly stressed the need to create more jobs.
“I would say at this point that fiscal policy stimulus is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said cautiously. “But nevertheless, let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.”
She went on to say that there can be many reasons beyond achieving full employment to change fiscal policy. However, she warned about the danger of a growing debt-to-GDP ratio that accompanies increases in the national debt.