"Over the next year, I anticipate that the Fed will boost rates 3 or 4 additional times to stabilize the unemployment rate," said Former Chair of U.S. Federal Reserve System Board of Governors Janet L. Yellen, at the Caijing Magazine Annual Conference on Tuesday.
But Yellen said that the policy was not on a preset course, and the actual pace of the Fed tightening would depend on how inflation and the labor market evolve relative to current expectations.
Regarding some key macroeconomic objectives, Yellen said the United States was performing exceptionally well. At 3.7 percent, the U.S. unemployment rate has fallen to a 50-year low.
"Even after nine years of expansion, job gains still average around 200,000 per month. Inflation fell short of the Fed's 2 percent objective for almost six years, but it moved up and now looks to have settled near the Fed's 2 percent target. Strong US growth is a support to the global economy," said Yellen.
However, Yellen noted that although the current US macroeconomic situation was excellent, central bankers have seen some risks.
One risk, according to Yellen, pertains to the chance of a recession in the next few years. Expansions don't usually die of old age; typically, there's a reason.
"Sometimes it's due to imbalances that are driving an unsustainable boom. Most often the reason is that the Fed causes a recession by tightening its policy to bring inflation down. I don't see the US economy at this point as suffering from serious imbalances. Household debt has declined considerably, and credit growth has been moderate," said Yellen.
From Yellen's point of view, the banking system is far better capitalized and more liquid than before the crisis; leverage in the financial sector is well below pre-crisis levels.
"I am concerned by the high level of non-financial corporate debts, which could be vulnerable in a slowing economy with rising interest rates; but the debt looks largely to be held by unlevered investors," said Yellen.
Asset prices are elevated relative to historic valuation norms but reasonably normal relative to the low levels of long-term yields, according to Yellen.
"There are risks that those rates could rise but many economists believe that a slow productivity growth, an ageing population and a strong demand for safe assets will depress real interest rates in the U.S. and other developed economies for a long time to come," said Yellen.
Yellen said there was a risk that the Fed would cause the next recession, but with skill and luck, she believes it's something the Fed has a good chance to avoid.
"Job gains are continuing at around 200,000 a month, a pace well above the level consistent with a stable unemployment rate. Moreover, unemployment has already declined below levels judged to be sustainable over the long run, and the current pace of growth of around 3 percent far exceeds the growth rate of potential output. This partly reflects the highly stimulatory fiscal policy that is now in place. To complicate matters, that stimulus may well phase out at exactly the time that monetary policy begins to bite-in 2020 or 2021," said Yellen.
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