US Federal Reserve Chairwoman Janet Yellen said on Tuesday that policies put in place by the Trump administration could affect the country’s economic outlook, but that it was too early to know what changes would be implemented and how they might determine the pace of interest rate rises.
Nevertheless, markets interpreted her remarks as a hawkish sign that rates could rise more rapidly than previously priced in, sending the dollar to its highest level in over a month.
Speaking to the Senate Banking Committee, Ms Yellen said that quicker rates increases would be appropriate if the economy remains on track and key inflation and labour targets are met.
But she also added that she hopes that future investments would concentrate on improving living standards and increasing productivity, and that the government keeps fiscal accounts “on a sustainable trajectory”.
“While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity,” she said.
“In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy,” she added.
Tuesday’s semi-annual report on monetary policy marks Ms Yellen’s first since Donald Trump was elected president in November on the back of campaign promises of economic prosperity and rapid job creation.
If Mr Trump’s policies translate into swift economic growth, that could encourage the Federal Reserve to raise interest rates faster, and on Tuesday Ms Yellen emphasised that the Fed stands ready to raise rates more rapidly if the conditions become right.
“Waiting too long to remove accommodation would be unwise, potentially requiring the [Federal Open Market Committee] to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she said.
The Fed is next scheduled to meet 14-15 March. It last raised interest rates in December.
Last week, the Fed’s top bank regulator announced that he was resigning from the central bank.
Daniel Tarullo, who was seen as a strong regulator and who tended to be dovish on monetary policy, said in a resignation letter to Mr Trump that he would leave the Fed on or around 5 April.
His resignation, leaves Mr Trump with three positions to fill on the Fed's Board of Governors, which has seven members.
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