It’s faring quite well, according to new information.
Well enough for Federal Reserve chairwoman Janet Yellen to state that the nation’s central bank plans to raise short-term interest rates a few times a year until they near 3 percent at the end of 2019.
Yellen is talking about the federal funds rate — the rate at which financial institutions lend each other money, but it’s also the rate on which most short-term interest rates are based. The federal funds rate is 0.75 percent after two 0.25 percent increases in the last two years. U.S. interest rates had been near zero since late 2008.
In a speech today at the Commonwealth Club in San Francisco, Yellen called 3 percent a “neutral rate” because it will keep the economy on an “even keel” after it reaches the Fed’s goals of maximum employment and 2 percent inflation.
“As the economy approaches our objectives, it makes sense to gradually reduce the level of monetary policy support,” Yellen explained. “Changes in monetary policy take time to work their way into the economy. Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.”
Economic indicators show that the U.S. economy has steadily improved in the last year. And most regional economies across the country expanded at a “modest” pace during the last six weeks of 2016, according to the the Fed’s Beige Book report.
All 12 regional Federal Reserve Banks (see map above) reported employment growth and most noted tight labor markets. Manufacturing activity and sales increased in many areas. Energy activity was mixed.
Construction and real estate activity is starting to level off in some areas. While some districts, such as the Atlanta, Cleveland and San Francisco districts, continued to see strong housing markets, high-end housing and commercial real estate markets weakened in the New York area, and home building lagged in the Minneapolis district.
Most areas saw higher retail sales. Data from the U.S. Census Bureau shows that holiday* retail spending rose 4 percent to $935.3 billion in 2016 from 2015, beating the 2.2 percent increase from 2014 to 2015.
However, some Fed districts reported disappointing holiday sales last year, saying e-commerce growth appeared to come at the expense of bricks-and-mortar retailers. E-commerce holiday* spending jumped 12.8 percent in 2016, the biggest increase in five years, while holiday spending at general merchandise stores fell 2.1 percent, according to the Census data.
U.S. companies in many industries are optimistic about economic growth this year, according to the Fed’s Beige Book. Fed chief Yellen, however, noted today that future productivity growth, output and new business rates will be “significantly slower” than post-World War II averages.
* For November and December combined of each year.