(Recasts lead, adds background, quote) By Richard Leong NEW YORK, Aug 26 (Reuters) – Interest rates traders raised their view the Federal Reserve would hike USA rates by the end of 2016 after Fed Chair Janet Yellen said the case for higher rates has strengthened on an improving labor market.
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Yellen sketched a generally upbeat assessment of the economy in a speech to an annual conference of central bankers in Jackson Hole, Wyo.
Some economists have said they think conditions are ripe for the Fed to alert investors that it may be inclined to act at its next policy meeting, September 20-21. She, however, failed to disclose the timing of the potential rate hike.
She also noted that while inflation is still running below the Fed’s 2 percent target, it’s being depressed mainly by temporary factors. She said solid growth in household spending had led to an expansion of the United States economy.
Traders since last week were betting that the Fed will not act at least by its December meeting because of a mixed economic performance, as the economy is creating more jobs than expected but inflation is showing a weak trend. 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.
Asked whether people should “be on the edge of our seat” for a rate hike in September and for more than one policy tightening before the end of the year, Dr Fischer said: “I think what the chair said today was consistent with answering yes to both of your questions, but these are not things we know until we see the data”.
“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market”, she said.
In a footnote she referred to recent Fed research indicating that a bad downturn that begins when rates are low could require the Fed to take on another $4 trillion in assets, doubling its current balance sheet.
“This is the next most important global event and will deeply influence the markets if and when the US Fed will be able to muster enough courage to hike rates this year”.
David Jones, chief economist at DMJ Advisors, said this week that he thought the chances of a September rate hike are rising, especially if forthcoming economic data, including next week’s jobs report for August, show strength. The rate had been kept near zero since the depths of the 2008 financial crisis.
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Yellen is the lead-off speaker Friday for an annual conference attended by members of the Fed’s board of governors in Washington, officials from the Fed’s 12 regional banks and monetary leaders from around the world.
