When the chair of the U.S. Federal Reserve speaks, the world listens. Well, OK, the entire world doesn't listen, but investors and economists all over the world do. And Janet Yellen's take on the health of the U.S. economy was largely positive. Speaking at the World Affairs Council of Philadelphia on Monday, Yellen said:
"The news from the labor market over the past year has been generally good, with significant job gains, the unemployment rate declining below 5 percent, rising household incomes, and tentative signs of faster wage growth."
Yellen also said she sees strength in the housing market.
But analysts are always parsing the Fed chair's words for hints that might indicate whether overall the Fed is feeling a little more confident or a little less confident about economic growth. Part of that is because investors want to know when the Federal Reserve is most likely to start raising interest rates again.
And on the downside, Yellen said, "recent signs of a slowdown in job creation bear close watching." Yellen was referring to the latest monthly jobs report from the labor department, which with a gain of just 38,000 jobs nationwide was much weaker than expected. She went on to say:
"Inflation has been lower than our objective of 2 percent, but I expect it to move up over time for reasons that I will describe. If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. However, I will emphasize that monetary policy is not on a preset course..."
Analysts said they heard a tone shift in those last few words. In a previous speech, Yellen had said it was likely that the Fed would raise interest rates again "in coming months." That precise wording was missing from this speech. So in effect, a rate hike likely "in coming months" has been replaced by "monetary policy is not on a preset course."
Why should anybody care? Well, when interest rates rise, that affects mortgage rates, loans for small businesses, the payments millions of Americans have to make on their adjustable rate car loans and home-equity lines of credit. Many different types of loans will gradually get more expensive as interest rates rise.
And there's a bit of a Catch-22 here. If job growth looks nice and strong, and the economy is chugging along, that's good news. But it's also likely to mean the Fed will raise interest rates so the economy doesn't overheat. And many people might think it is bad news that their adjustable loan payments are going up. Basically, by making car payments and home-equity line payments (or buying a house) a little more expensive for people, the Fed is tapping the brakes a bit on the economy — or at least taking its foot off the gas pedal.
We learned today that the next interest rate hike just might be a little farther down the road than we thought.
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