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Published: Mon, August 29, 2016
Economy | By Melissa Porter

Yellen suggests rate hike is coming but offers no timetable


Yellen said if future Fed leaders kept rates near zero "they might inadvertently encourage excessive risk-taking and so undermine financial stability". Justifications for an interest rate increase in the United States have grown in recent months, US Fed chief Janet Yellen said today. At the same time, consumer spending, which makes up more than two-thirds of economic activity, grew at the fastest rate since the fourth quarter of 2014. But he said that would depend on the strength of forthcoming economic data. Yellen did imply that a September rate hike would be "appropriate", but left enough wiggle room that the Fed can continue to keep rates lower for longer.

And in a speech Sunday, Fischer said the Fed was getting "close to our targets", including being "within hailing distance" of the Fed's 2-percent goal for inflation.

Stocks later reversed course to trade lower after hawkish comments from Fed Vice Chair Stanley Fischer raised the possibility of a rate hike as soon as next month.

"Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years", Yellen said during her presentation posted on the Fed's website.

Such uncertainty, she said, is inherent in the inability to predict economic shocks.

But after sharp swings, the U.S. dollar was flat against the euro at $1.1286 and slightly lower against the yen at 100.28 yen.

Because slower growth means future USA interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates.

The perceived chances of a rate hike in September climbed to 36 percent from 21 percent the previous day, according to CME Group's FedWatch tool.

"Although fiscal policies and structural reforms can play an important role in strengthening the US economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy", Yellen said. She said the Fed still planned in the future to wind down its massive balance sheet but that it would take time, adding that the balance sheet was likely to be useful for policy for some time.

Such a view is "exaggerated", Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions.

Belisle said if the markets interpreted Yellen's comments as more hawkish, that benefited the US dollar. She said efforts need to be made, in particular, to boost the productivity of US workers.

Yellen was the lead-off speaker Friday for the annual conference sponsored by the Federal Reserve Bank of Kansas City.

The group, some wearing T-shirts bearing the slogan, "We Need a People's Fed!" posed questions about economic policy and the need for diversity to the Fed officials who took part in the 90-minute discussion.

The coalition also wants the Fed and Congress to consider changes in the makeup of the boards of directors of the 12 regional banks to promote more diversity among a group of officials that is mainly white and male and dominated by bankers.

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