The Federal Reserve will adopt a gradual approach to rate hikes, although another increase over the summer could be warranted, Chair Janet Yellen said during an event on Friday afternoon.
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“It’s appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time”, Yellen said in a Question-And-Answer session with Harvard economics professor Gregory Mankiw. The comments add to the rate hike hints from other Fed officials in recent speeches, although apart from saying the June Federal Open Market Committee meeting is “live” for a rate hike, no further guidance has been given on timing.
Although Yellen expressed caution about too steep a rise in U.S. rates, she sounded more confident than she has in the past that the United States economy has rebounded from a weak winter and that inflation would edge higher toward the Fed’s 2 percent target.
“It looks like the Fed is really getting ready to go, but Yellen is retaining optionality to go over the next few months”, said Gennadiy Goldberg, a New York-based interest-rate strategist at TD Securities (USA) LLC, one of 23 primary dealers that trade with the central bank.
In addition to the latest round of hawkish-sounding comments from Yellen, political developments in Tokyo were also seen supporting the dollar against its Japanese counterpart.
The Fed raised its key policy rate for the first time in almost a decade in December, pushing the rate from a record low near zero to a range of 0.25 percent to 0.5 percent.
The Fed’s benchmark rate now stands at 0.5 percent, after the central bank hiked it by a quarter point six months ago.
Financial stocks advanced, with Bank of America rising 1.2 percent and JPMorgan Chase and Goldman Sachs both up 0.6 percent. A move could happen “in coming months”, Yellen said Friday during remarks at Harvard University.
“If we were to raise interest rates too steeply and we were to trigger a downturn or contribute to a downturn, we have limited scope for responding, and it is an important reason for caution”, she said. That’s higher than the initial 0.5 percent estimate last month.
Earlier in the week, Dallas Fed President Robert Kaplan said he expected at least two rate hikes in 2016. She also drew encouragement from a recent rise in labor force participation as more Americans resumed looking for a job. When asked about the United Kingdom referendum on June 23 on whether to leave the European Union, Bullard said nothing would change immediately even if Britons were to vote in favour of leaving.
“What you can expect would be increases in credit card rates and home equity lines of credit in reaction to the Fed”, McBride said.
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On that note, earlier in the same day Stephen Major at HSBC told Bloomberg TV that he did not think two-year US Treasuries were expensive, because if the Fed raised rates twice more in 2016 and then stopped yields would then fall back.
