Federal Reserve Chair Janet Yellen said more interest-rate increases will be appropriate if the U.S. economy meets the central bank’s outlook of gradually rising inflation and tightening labor markets.

“At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she told the Senate Banking Committee in prepared remarks Tuesday.

Yellen’s semiannual report on monetary policy is her first since Donald Trump became president vowing to boost U.S. growth, which could push the Federal Open Market Committee to pick up the pace of rate hikes if such steps fan higher inflation. She reiterated that falling behind on inflation could harm to the economy and possible cut short the expansion.

“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she added.

David Fuller's view

Trump’s main effort is to strengthen the US economy.  Surely he knows how to do this.  He has also selected a very capable cabinet team of Wall Street experts to help him achieve this important objective. 

Yellen’s current concern is most likely the possibility of a trade war. This is understandable because Trump’s crude Art of the Deal tactics, supposedly to bully opposition into a weaker position, amount to playing with fire on the international stage.  These are obviously not one-off relationships; a president often has to negotiate with foreign leaders on numerous occasions. 

Trump needs to keep smart daughter Ivanka close to hand.  This kept him in line with Canada’s Justin Trudeau and should also help elsewhere. 

Meanwhile, the next quarter-point rate hike from the Fed could occur in March, although commentators only rate this as a 34% possibility.  That may be too low.

The Dollar Index has been mostly ranging since November.  It also fell back sharply from its high for this move to date at 103.820 on January 3^rd, with the help of Trump’s jawboning.  That may prove less effective over time, particularly as Yellen will be raising US rates, presumably at least two to three times this year. 

A stronger USD, in response to economic recovery, higher interest rates, energy independence when required, and an increasing technological lead, are a recipe for a stronger Dollar over the long-term.