Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase

JACKSON HOLE, WYO. -- Federal Reserve Chairwoman Janet Yellen signaled growing conviction that the central bank will raise short-term interest rates in the weeks or months ahead.

"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Ms. Yellen said in remarks prepared for delivery here.

The remarks left the door open for a Fed rate increase at its Sept. 20-21 policy meeting, but the chairwoman hedged her comments in ways that give the central bank an out if economic data disappoint in the next few weeks. Most importantly, the Fed's decision appears to hinge on whether the Labor Department's Sept. 2 jobs report shows steady gains in hiring.

"Our decisions always depend on the degree to which incoming data continues to confirm the (Fed's) outlook," she said. If the Fed doesn't move in September, it has two more meetings this year, one in November just before U.S. elections and another in December. Her comments suggest she expects a move at one of these meetings if a September move doesn't happen.

The Fed pushed rates to near zero in December 2008, kept them there for seven years and then nudged them up a quarter percentage point last December. Officials began the year expecting to raise rates four times in quarter-point increments but have delayed moving them because economic growth disappointed in the first half of the year and because they were uncertain about developments overseas and about the strength of the U.S. job market after some soft reports.

Ms. Yellen said her worries had dissipated.

"While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market," Ms. Yellen said. Broad measures of labor market slack are improving, even though the unemployment rate has been steady most of the year near 5%, she added.

The Fed leader suggested that internal forecasts for the outlook have been steady since officials at the central bank last wrote down their projections for growth, unemployment and inflation. The evolution of these forecasts helps drive Fed decisions about rates. If the forecasts were deteriorating, the Fed would be more likely to stand pat on rates or to look for new ways to support growth.

"The (Fed) expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years," Ms. Yellen said. "Based on this economic outlook, the (Fed) continues to anticipate gradual increases in the federal funds rate will be appropriate over time."