On a sunny day in San Francisco, Federal Reserve Chair Janet Yellen said that the Fed is nearing its binary goal of price stability and full employment. The Fed Chair’s views on the US economy are hawkish. In a speech titled ‘’The goals of monetary policy and how we pursue them’’ Yellen expected that the Fed will raise interest rates ‘’a few’’ times from 2017 to 2019.
Key measures of inflation show that for December of 2016 inflation is close to 2%. GDP growth has increased from 3.2% to 3.5%. This increase is reflective of increase in inventory accumulation and a growth in agricultural exports. Consumer spending is also heathy with favourable income growth and household balance sheets.
Gradually, inflation is moving towards the Fed’s optimal level of 2%. Consumer prices rose 0.3% in December. Inflation data showed that gasoline prices soared 9.1%, 7.8% for utilities, 4.7% for medical supplies and 3.6% for housing.
These signs of diminishing slack in the US economy show that the Fed should increase interest rates in 2017.
However, the imminent Trump administration is a huge unknown for the Federal Reserve. Donald Trump has promised to increase government spending and decrease taxes, although specifics of these polices are undisclosed. The Fed are uncertain of the scope that these policy reforms will have on the US economy. .