Yellen lays groundwork for December rate hike

Federal Reserve Chairwoman Janet Yellen cautioned Wednesday that a delay in raising interest rates could drive the U.S. into a recession.

Speaking in Washington, Yellen did little to dissuade a common perception that the Fed is on the cusp of its first interest rate hike in nearly a decade. Arguing that the economy has steadily improved and appears poised to continue on that trajectory, Yellen highlighted the risks of inaction from the Fed.

{mosads}She contended that if the Fed waits too long to raise rates, the central bank might have to catch up to an overheating economy by raising rates rapidly, which comes with heavy risks.

“We would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” she said. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

The Fed meets Dec. 16 to update its policy for the final time in 2015, and Yellen has indicated she would like to raise rates before the year is out.

Yellen even went so far as to say many are “looking forward” to the day the Fed finally raises rates, saying it would be a testament to how far the economy has come since the financial crisis of 2008.

She added that she believes the economy is positioned to continue showing gains in the labor market, as inflation slowly rises towards the Fed’s 2 percent target.

For months, Yellen has emphasized that the Fed wants to move slowly and deliberately on interest rates. She has added that she does not want financial markets to overreact to the initial hike, which will be small, and that the Fed will be constantly monitoring incoming economic data before deciding to further increase rates.

Yet again, Yellen underlined Wednesday that the Fed is not on a preset course, and that rate hikes will not be steadily coming after the first one.

“Even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” she said.

Markets were relatively steady following Yellen’s remarks. And she will have a chance to expand on her thinking with lawmakers Thursday, when she testifies before the Joint Economic Committee.