Yellen: December interest-rate hike a ‘live possibility’

Federal Reserve (the Fed) Chairman Janet Yellen said last Wednesday that an interest-rate hike in December is a “live possibility” if the economy stays on track. Yellen described the US economy as “performing well” right now, with solid growth in domestic spending. At their meeting last week, policymakers believed that the threat of global headwinds had ebbed, Yellen said.

At its December 15 and 16 meeting, the Fed will consider raising a key interest rate from a record low near zero if the economy continues to grow at a strong enough pace to keep adding jobs and push annual inflation toward the Fed’s 2-percent target, Yellen said. Yellen stressed that no decision has been made yet, and a move in December will depend on how the economy fares between now and then. She reiterated that when the Fed does start raising rates, it will do so gradually.

She said she understood that “there is a great deal of focus” on the timing of the Fed’s first rate hike in nearly a decade. But she said the more important focus should be on the pace of rate hikes after the Fed decides to move.

“The committee’s expectation is that it will be a very gradual path and…will depend very much on the actual performance of the economy,” she said. Yellen’s comments came in response to questions during an appearance before the House Financial Services Committee on Wednesday. William Dudley, president of the Fed’s New York regional bank, said at a separate appearance later in the day that he was in full agreement that December was a “live possibility and we will see what the data shows.”

The main topic of the committee hearing was banking supervision and regulation. On that subject, Yellen said that the country’s largest financial institutions are still falling short of managing the types of risks that led to the 2008 financial crisis.

While Yellen acknowledged progress in making the financial system more resilient to shocks, she expressed concerns about the “substantial compliance and risk-management issues” at the institutions.

“Compliance breakdowns in recent years have undermined confidence in the [banks’] risk management and controls and could have implications for financial stability, given the firms’ size, complexity and interconnectedness,” Yellen said.

The group includes the eight largest banks in the US, a number of major foreign banks operating in the US and several large institutions that have been judged systemically important. Republicans on the House committee have been critical of many of the regulatory changes the Fed is undertaking to implement the 2010 Dodd-Frank Act.

Committee Chairman Jeb Hensarling, Republican-Texas, criticized the Fed for failing to provide enough details about the annual stress tests it conducts on the biggest banks to ensure they can withstand a severe financial downturn.

He told Yellen he had great concern about “how opaque and nontransparent” the stress tests are.

Yellen said that the Fed tries to provide banks detailed information about the methodologies it is using to structure the tests each year.

The Fed’s overriding goal is to make sure that it has sufficiently addressed the kind of problems that lead to the 2008 crisis, the worst financial crisis in the US in seven decades, Yellen said.

“We have made changes in our supervision that now allow us to supervise large financial institutions on a more coordinated, forward-looking basis,” Yellen added­.

-- Associated Press