Fed's Powell says case for interest-rate hike has strengthened over the past few weeks

The labor market shows an economy “on solid footing,” while inflation is nearing the central bank’s 2% target, suggesting that the U.S. central bank can pull the trigger on the first interest-rate hike this year, said Federal Reserve Gov. Jerome Powell on Tuesday. “In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month,” Powell said in a speech prepared for delivery to The Economic Club of Indiana in Indianapolis. Powell said the economy has “clearly strengthened” since the “soft patch” seen in the first half of the year.

The Fed pushed interest rates higher late last year but has remained on the sidelines this year given market turmoil and a weak first-half U..S. economy. But the economy has shown renewed vigor since the summer. U.S. gross domestic product growth hit 3.2% in the third quarter, the fastest pace in more than two years. Bond yields have risen since the last Fed meeting on Nov. 1-2 as investors expect the central bank to raise rates. They saw the central bank’s decision to stand pat in November as a way to avoid the spotlight during the presidential election campaign.

Yields on the U.S. 10 year note TMUBMUSD10Y, +0.16% have risen to 2.32% from 1.75% in late October. Powell said the future path of interest rates will depend on the economy. The Fed has been able to be patient about raising rates, he said, but there are concerns that moving too slowly may force the Fed to tighten policy “abruptly” later on. Powell’s comments dovetail with other Fed speakers in recent days.

In testimony to Congress in mid-November, Fed Chairwoman Janet Yellen said the Fed might hike interest rates “relatively soon.” As a result of Yellen’s remarks, the market now sees an almost 100% probability of a quarter-percentage point rate hike at the Fed’s next meeting on Dec. 13-14, according to the CME Group’s FedWatch Tool.