Janet Yellen, chair of the Federal Reserve, indicated Friday at a highly anticipated speech in Jackson Hole, Wyoming, that the central bank may soon raise interest rates in light of a strengthening economy.
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Federal Reserve Chair Janet Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank’s goals, Bloomberg reported. Bonds then resumed weakening after Fed Vice Chair Stanley Fischer said Yellen’s speech was consistent with expectations for possible interest rate increases this year.
Yellen pointed to a recent rebound in employment and said the Fed expects the economy to continue expanding. According to data from the CME Group this week, investors foresee only about a 21 percent probability of a rate hike in September and only about a 52 percent chance by December.
Markets have been watching closely for signs the Fed is ready to start raising U.S. interest rates, a move that would lift the United States dollar and push down the kiwi.
In the run-up to the US Fed chief’s speech, dealers here were keeping their fingers crossed in case she gave any signal of when the second rate hike could come.
Plus, such ambiguity from Yellen may indicate that the Fed will wait until its meeting in December to raise rates. “But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively”, she added.
Her assessment was more straightforward than Fed pronouncements at previous meetings, which had taken noted of the mixed economic picture of relatively lower inflation and weak productivity.
The Fed raised rates in December, its first hike in almost a decade, but it has held off further increases so far this year due to a global growth slowdown, financial market volatility and an inflation rate persistently below its 2 percent target. She also described consumer spending as “solid”, but noted that business investment was weak and exports were taking a hit from a strong USA dollar.
Market reaction has been generally positive.
A government report released today showed that the US 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 December, the Fed raised its benchmark rate modestly in response to a brighter economic picture, notably a job market nearing full health.
“It was completely in line with most expectations”, Drilling said in an interview.
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She, however, also said that future rate increases should be “gradual”. That is the equivalent of quarterly growth of between 0.25 per cent and 0.3 per cent – less than half the 0.6 per cent growth rate seen in the UK. The conference draws members of the Fed’s board of governors in Washington, officials from the 12 regional banks and monetary leaders from around the world.
