Data before December FOMC will be key, Fed's Yellen says

The economic recovery Stateside was progressing well, but a rate rise come December was still not guaranteed, the president of the US central bank said on Wednesday evening.

Speaking to the Economic Club of Washington, Fed chair Janet Yellen said the economic data since October had been consistent with expectations for an improved job market, but left open the possibility that the data released before its next meeting – on 15-16 December - could still sway the Federal Open Market Committee either way.

“I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” Yellen said.

“Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2% as the disinflationary effects of declines in energy and import prices wane,” she added.

Her words appeared to set the stage at the FOMC's next policy meeting on 15-16 December.

However, on a more guarded note she went on to say that: "Between today and the next FOMC meeting, we will receive additional data that bear on the economic outlook. When my colleagues and I meet, we will assess all of the available data and their implications for the economic outlook in making our policy decision."

Having said that, if the monetary authority waited too long before tightening policy then it might have to do so abruptly and risked excessive risk-taking, she explained.

"Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly... [This] would risk disrupting financial markets and perhaps even inadvertently push the economy into recession".

"So there it is: Hike now, to avoid faster, more risky hikes later. We look for 25bp this month and a further 50bp by mid-16", Pantheon Macroeconomics chief economist Ian Shepherdson said in a research note sent to clients.

"In a nutshell: The Federal Reserve today has made another large step towards its first rate hike in 9.5 years, as Chair Yellen and centrist FOMC member Lockhart highlighted in unison that in their view the conditions for the liftoff are now met. Barring any “drastic change” in the outlook or the occurrence of a massive external shock within the coming two weeks, the Fed will therefore finally begin to normalize its policy stance. And there should be nobody left, who is surprised by the move," said Harm Bandholz, chief US economist at Unicredit Research.