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Federal Reserve Chairwoman Janet Yellen acknowledged that economic growth has been “disappointing,” but also said it would be “unwise” to wait too long to raise interest rates given recent improvements to inflation and the overall economy.

“The economy has recovered more quickly, for example, than … European Union economies have in the aftermath of the crisis,” Yellen said in her second day of congressional testimony before the House of Financial Services Committee, on Wednesday. “The Federal Reserve has put in place highly accommodative monetary policies meant to spur spending in the economy and restore low unemployment or to achieve the goal of maximizing employment and price stability as assigned to us by Congress.”[1]

However, just one day earlier, the Fed Chair told Congress it would be “unwise” to keep rates low for too long, given the recent pick up in economic growth and inflation. According to analysts, this leaves the door open to a rate hike as soon as March, when the Federal Open Market Committee (FOMC) gathers for its second meeting of the year.[2]

It’s starting to look like traders aren’t putting much faith in the possibility of liftoff next month. The likelihood of a March rate hike is currently at less than 27% according to the CME Fed Fund futures prices, which have long been used to gauge the market’s views on U.S. monetary policy. That likelihood jumps to around 52% in May and 74% in June.

Prior to Yellen’s testimony this week, traders had pegged June 13-14 as the meeting most likely to produce the next rate hike. Since the end of the financial crisis, the central bank has raised interest rates only twice.

Yellen’s view that the economy is improving was vindicated on Wednesday after the Labor Department said consumer inflation soared to nearly four-year highs in January. The consumer price index (CPI) rose 2.5% in the 12 months through January, edging out forecasts calling for 2.4%. The U.S. central bank targets inflation at 2%, but relies on another measure to track it.

Core inflation, which strips away volatile goods such as food and energy, strengthened 2.3% year-over-year from 2.2% previously.

Separately, the Commerce Department said retail sales rose 0.4% in January, again much higher than forecasts. Core sales, which exclude automobiles, gasoline, building materials and food services, also climbed 0.4%, official data showed.[3]

These figures were partially offset by a small drop in factory output. The Fed reported that industrial production, a broad measure of factory output that includes manufacturers, miners and utilities companies, fell 0.3% in January.

The Fed boss, who was appointed in 2014 as the first female head of the all-powerful central bank, also gave a clear assessment of the stock market’s latest rally.

“I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings,” Yellen said in response to a question on Wednesday.[4]

Wall Street is in the middle of another record-setting run, with the S&P 500 and Dow Jones Industrial Average reaching new all-time highs in each of the last five sessions. The latest rally began last Thursday, when President Donald Trump promised to announce a “phenomenal” tax plan in the coming weeks.[5]

U.S. stocks have been in a perpetual uptrend since the November 8 election on hopes the Trump administration would mark a new era of economic growth. Since coming to power on January 20, the President has dropped out of the Trans-Pacific Partnership (TPP), vowed to renegotiate the North American Free Trade Agreement (NAFTA) and issued an executive degree to begin rolling back the Dodd-Frank financial legislation. That was before last week’s renewed promise of deep tax cuts.

The Fed is carefully watching the Trump rally over fears it might trigger faster inflation. A speedy rise in consumer prices could force policymakers to continue raising interest rates faster than previously expected. In raising rates in December, the Fed forecast three additional rate hikes in 2017, followed by two or three in 2018. Policymakers will issue revised forecasts at the conclusion of their March meetings.

[1] Jeff Cox (February 15, 2017). “Yellen: Growth is ‘quite disappointing’ – but that’s not the Fed’s fault.” CNBC.

[2] Jeff Cox (February 14, 2017). “Fed Chair Yellen: ‘Unwise’ to wait too long to hike interest rates.” CNBC.

[3] Reuters (February 15, 2017). “U.S. retail sales rise; inflation posts largest gain in four years.”

[4] Mark DeCambre (February 15, 2017). “Yellen may have offered the clearest explanation for the stock market’s record run.” Market Watch.

[5] Sam Bourgi (February 9, 2017). “S&P 500 Futures Rise to New Record as Trump Rally Continues.” Economic Calendar.

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