Central bankers are now in Jackson Hole, Wyoming, for the Federal Reserve’s annual two-day symposium and are anticipating chair Janet Yellen’s speech tomorrow morning.
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The US Federal Reserve has suffered stinging criticism in recent months for a perceived lack of coherence in its public positions on monetary policy, and markets had eagerly awaited her speech for some policy clarity.
“I believe that our economic conditions are increasingly becoming more favourable for a Fed Fund Rate increase – especially in the past couple of months”, said Yellen during a speech at the Annual Federal Reserve Conference Meeting on Friday, August 26, in Jackson Hole, Wyoming, US.
“Interest rate policy is by far the most flexible, the least intrusive to markets, and has proven capable of targeting low inflation”, he said in a presentation after Ms. Yellen spoke.
“In light of the continued solid performance of the labour market and our outlook for economic activity and inflation”, Yellen said, “I believe the case for an increase (in the Fed’s benchmark borrowing rate) has strengthened in recent months”. Yellen explained that strong domestic consumption will drive the economy, when domestic and foreign investments are experiencing a downtrend, and if exports stalls due to the appreciation of the US Dollar.
The greenback gained versus most of its peers as futures prices showed a 64 percent chance for a Fed rate increase by December, up from 55 percent before Yellen’s remarks in Jackson Hole, Wyo., on Friday.
“Over last two or three trading sessions as well, the likely direction US Fed will take on rate hikes has been an important factor for local markets”, said Pankaj Sharma, head of equities at Equirus Securities. The rate had been kept at a record low near zero since the depths of the 2008 financial crisis.
The ECB, the Bank of Japan, the People’s Bank of China and the Bank of Rossiya and the Bank of England have all slashed interest rates on boosted quantitative easing programs in a desperate bid to boost economic growth. Yellen, however, explained the Fed now has new tools which proved particularly useful in combating the lingering effects of the Great Recession. Moving forward, these provide the Fed with ample ammunition to combat the threats of a potential recession in the future. Instead, she stressed, as she frequently has, that the Fed’s rate decisions will depend on whether the freshest economic data continues to confirm its outlook.
“Indian markets are expected to see a positive opening (On Monday) as the chances of a Fed Rate hike in September is off the table”.
Markets initially read Yellen as relatively dovish but a follow conversation between Fed vice-chair Stanley Fischer and CNBC changed all that.
One market that will be watching the Fed decision closely is Hong Kong, which pegs its currency to the USA dollar.
Even if the Fed raises rates this year, they’ll still be at rock-bottom levels, and the central bank has pledged to remain accommodative.
He pointed to the rising Libor rate – the London Interbank Offer Rate – which makes borrowing more expensive for financial institutions that don’t have access to Fed funds to borrow money.
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Yellen’s words returned a measure of clarity to the intentions of United States monetary policymakers, who have been publicly at odds in recent months over the need to raise rates in the near-term. “In the global wide search for yield, US stocks are still attractive”, said Cavanaugh.
