Trump to inherit economy on the up; Odds of December rate rise shorten

Janet Yellen has stressed the importance of central bank independence in her first public remarks since Donald Trump’s election victory as new data showed the president-elect will inherit a strengthening economy.

The Federal Reserve chair told Congress yesterday that an increase in short-term interest rates could “become appropriate relatively soon”, raising expectations of a rise at the Fed’s next meeting in December. New economic figures showed a surge in housing starts and a pick-up in inflation.

Ms Yellen said it was “critically important” that central banks have the freedom to make judgments about how best to pursue their goals. Her remarks followed attacks during the election campaign by Mr Trump, who claimed the Fed had kept interest rates low to help the Obama administration.

“There is clear evidence of better ­outcomes in countries where central banks can take the long view [and] are not subject to short-term political pressures,” she said. “Sometimes central banks need to do things that are not immediately popular for the health of the economy.”

The Fed’s next meeting is on December 13-14, five weeks before Mr Trump’s inauguration. Economists said the fresh batch of data showing an improving economy increased the chances of it deciding to raise rates.

Ms Yellen said an increase could be justified if “incoming data provide some further evidence of continued progress toward the committee’s objectives”.

Chris Rupkey, chief financial economist at the bank MUFG, said: “President-elect Trump seems to have hit the jackpot in inheriting an economy that is the strongest, the closest to full employment in years.”

Data released yesterday showed the biggest rise in US consumer prices in six months in October and a jump in housing starts that took them to a nine-year high. First-time applications for unemployment benefits also tumbled to a 43-year low last week.

In its last statement in November the Fed said the case for higher rates had strengthened and that it was just waiting for some further signs of improvement before pushing through a second rate increase following last December’s quarter-point move.

Speaking to Congress’s Joint Economic Committee, Ms Yellen said the Fed did not want to wait too long. “Were the [Federal Open Market Committee] to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting [the] committee’s longer-run policy goals,” she said.

With rising expectations of Mr Trump pushing for a big fiscal stimulus next year, Ms Yellen said the election had created considerable uncertainty over the future path of economic policy. But she said it had not altered the Fed’s stance on monetary policy, for now.