Janet Yellen Affirms 2015 Rate Hike

At her semiannual report to Congress, Yellen said that the American economy was showing signs of persistent strength. “Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” she said, adding that low oil prices and increases in the employment rate were bolstering consumer spending. This rise in aggregate demand, she argued, would make a rise in interest rates appropriate later in the year.

At her semiannual report to Congress, Yellen said that the American economy was showing signs of persistent strength. “Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” she said, adding that low oil prices and increases in the employment rate were bolstering consumer spending. This rise in aggregate demand, she argued, would make a rise in interest rates appropriate later in the year.

At the same time, Janet Yellen warned that difficulties abroad were making the Fed cautious about the timing and extent of raising rates. “Foreign developments, in particular, pose some risks to U.S. growth,” she said, pointing at Europe and China as major concerns. “The recovery in the euro area appears to have gained a firmer footing; the situation in Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions,” she said. However, even in her cautions Yellen ended on an upbeat note, suggesting that these are more short-term volatile developments that are unlikely to have a long-term impact on American growth. “But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity. The U.S. economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively,” she said.

Labor Market Improvements

Yellen pointed to the headline unemployment rate decline, which now stands at 5.3%, slightly lower than it was a year ago. She also noted that gains in conform payroll employment is “sufficient to bring the total increase in employment” and cause further total demand in the market.

In addition to improvements in payrolls, Yellen said long-term unemployment was down, and less people who want to work full time are working part time. While remaining bullish on the labor market, Yellen did admit, “too many people are not searching for a job” now, hinting that discouraged workers are still flustered by a moribund job market. At the same time, Yellen was optimistic that this trend was likely to reverse.

Finally, on wages, Yellen admitted that income growth “continues to be relatively subdued, consisted with other indications of slack.” The weakness in wage gains may be an indication of too many workers and not enough work, as employers find it easy to hire and retain people without offering higher hourly compensation.

Production Ticks Upward

While Yellen sounded a hawkish note on monetary policy in Congress, the Federal Reserve also announced a 0.3% monthly rise in industrial production, although this was not enough to cause production to rise for the quarter. According to the Fed, industrial production fell “at an annual rate of 1.4% for the second quarter of 2015,” with manufacturing output unchanged. Motor vehicles and parts saw a 3.7% decline, while mining rose 1% and utilities rose 1.5%. Capacity utilization for industrials rose 0.2 percentage points to 78.4%, but remains 2.1% below the long-term average.

Analysts believe that capacity utilization is a critical indicator of aggregate demand, as factories usually remain idle only when there is insufficient demand for manufactured products. The low level of capacity utilization, which has fallen in recent months, may indicate less consumption in the American economy.