Temperatures are rising on the east coast, and so are the chances of higher interest rates.
Federal Reserve Chair Janet Yellen said in an interview Harvard economist Greg Mankiw on Friday, “It’s appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time,” and that market participants should be prepared for such a move “in the coming months.”
The two economists engaged in a wide-ranging discussion at Radcliffe Day in Cambridge Massachussetts, discussing both the Federal Reserve and the Fed Chair’s personal history, but investors were likely paying close attention to Yellen’s views on the U.S. economy in the here and now.
Mankiw joked that he had heard a number of Wall Streeters had delayed their trip out to the Hamptons in order to hear Yellen speak.
Yellen said she didn’t want to disappoint. Nonetheless, she struck a balanced tone, saying that “we are close to an unemployment rate that most economists would associate with our full employment goal,” and lauding the 2.7 million jobs that the American economy has created in the past year alone. At the same time, she argued that there are too many people with part time jobs who want full time positions, and that GDP growth has been far too low, partly as a result of slow-growing productivity. “Since productivity growth ultimately determines the pace of living standard growth that’s a really negative development,” for the American economy, Yellen said.
At the same time, inflation is moving closer toward the Fed’s 2% annual goal, and strong labor market growth suggest to Yellen that the Fed would have to raise rates again sooner rather than later. But Yellen’s mention of slow wage growth and slow productivity grow shows even if we get a rate hike in June, the next one probably won’t be in July.