THE Federal Reserve is on course to raise US interest rates this year in a decision that would signal the extent of the country’s recovery from the ‘trauma’ of the financial crisis, Janet Yellen told Congress on July 15.

The Fed chair said that the prospects for the US economy were ‘favourable’ as hiring propels the country towards maximum employment, arguing that factors that have held back inflation were likely to subside.

In a sometimes fractious session before the House Financial Services Committee in Washington, Ms Yellen acknowledged risks to the US from the Greek debt crisis and China’s attempts to tackle its high debt, weak property markets and ‘volatile’ financial conditions. China, on July 15, reported growth of 7pc in the second quarter, unchanged from the previous quarter as stimulus measures cushioned a long-term slowdown.

But Ms Yellen struck a positive tone on the progress the US has made since it was hit by the crisis, saying that employment has swelled by 12m jobs since its recession-induced trough and that growth should accelerate this year.

Her upbeat snapshot of the economy will reinforce suggestions by some leading policymakers, including William Dudley of the New York Federal Reserve, that a rate rise could be on the table as soon as September.

Congress told US heading for maximum employment. Growth expected to accelerate

Ms Yellen did not mention a given month for the first move in rates, saying the committee would determine the timing on a meeting-by-meeting basis. She argued the Fed should move sooner rather than later in order to allow it to pursue a shallow path of rises.

US growth faltered in the first quarter but has seen stronger indicators in recent months, even as some lawmakers and International Monetary Fund economists called for a delay to rate rises.

In response to her remarks, the euro fell 0.33pc to $1.0974 against the dollar, which was up by 0.36pc on the day against the yen, at Y123.80.

The Federal Open Market Committee has been divided over when to start raising rates, with different policymakers advocating one, two or no rises this year in their latest policy meeting.

“Looking forward, prospects are favourable for further improvement in the US labour market and the economy more broadly,” Ms Yellen told the hearing. “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalise the stance of monetary policy.”

If that decision is indeed made, it will ‘signal how much progress the economy has made in healing from the trauma of the financial crisis’, she added.

Her testimony came as Canada’s central bank trimmed its key rate yesterday, reflecting how its economy has suffered from falling oil prices, but Ms Yellen said that US growth was likely to strengthen over the rest of the year in part because of the benefit to household spending from low fuel prices. Low core inflation readings largely reflected influences that are ‘likely to be transitory’, she added, pointing to the recent stabilisation in energy prices.

Ms Yellen singled out a pickup in consumer spending and strong car sales in May and June as evidence that households now have the confidence and the means to make big purchases.

That said, there remained slack in the labour market, as indicated by ‘relatively subdued’ wage growth, the Fed chair said, arguing that the jobs market had further to go before attaining full health.

Published in Dawn, Economic & Business ,July 21st, 2015

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