The U.S. economy has improved in recent months to the point where near-crises levels of rates are not justified, Yellen said in her widely anticipated speech at the Economic Policy Symposium in Jackson Hole, Wyo. on Friday.
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“We need to raise rates to normalize”, said Jeff Carbone, managing partner at Cornerstone Financial Partners.
Some economists say they think conditions are ripe for Yellen to alert investors that the central bank may be inclined to act at its next policy meeting, September 20-21 – especially in light of recent remarks from other Fed officials. The Fed last raised rates nine months ago, the first time it had done so since the 2008 economic downturn. Investors have been doubtful about the central bank’s guidance, in part because its policymakers appear to be divided over whether to hike rates soon or take a more cautious approach.
Janet Yellen yesterday declared that the case for another interest rate rise in the United States has “strengthened” – setting the scene for a hike before the end of the year.
“For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide”.
However, Yellen stressed that the economic outlook remains uncertain and as a outcome monetary policy is subject to change. The Federal Fund’s rate, the rate the central bank charges other banks on overnight loans, has remained near record lows since late 2008 to stimulate business and consumer spending.
“As ever”, she said, “the economic outlook is uncertain, and so monetary policy is not on a preset course”.
A government report released today showed that the USA economy has expanded slower than previously estimated in the second quarter, as businesses are running down their inventories faster and state and local governments have reduced their spending. In sum, Yellen opened the door for a September rate hike with the same hedges she’s used in the past. Judging by the CME Group’s FedWatch tool, markets assigned a probability of just 18% to a September hike going into the speech. The economy is “nearing” the Fed’s goals of full employment and stable prices, share said.
Jim Paulsen, chief investment strategist at Wells Capital Management, said in an interview on a Wall Street Journal podcast that it was more than Yellen that suggested the possibility of two rate hikes this year.
The markets have been on tenterhooks all of this week in the run-up to Yellen’s speech.
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A bout of equity optimism spurred by Janet Yellen’s bullish economic assessment proved temporary and stocks slipped back into their three-week-old funk by midday, with the Dow Jones Industrial Average erasing a 123-point rally.
