Instead, Dr. Yellen made the usual observation that stronger productivity growth would be wonderful, but she offered no new ideas.
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Yellen told the gathering of central bankers from around the world the USA economy was nearing the central bank’s goals of maximum employment and price stability but she maintained that future hikes should be “gradual”. 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.
She also noted that while inflation is still running below the Fed’s 2% target, it’s being depressed mainly by temporary factors.
AMP Capital chief economist Shane Oliver said the ASX 200 futures fell four points or 0.1 per cent reflecting the United States lead, which points to a soft start to trade on Monday for the Australian share market. Now, the sentiment is that the rate hike could occur as early as September, although some think the Fed will wait until December, until after the USA presidential election.
Yellen’s synopsis of U.S. economic activity was notably optimistic, despite the fact the services sector posted unimpressive growth in August the day before.
The Commerce Department said Friday that the economy grew at a sluggish 1.1 percent in the second quarter, slightly less than the previously reported 1.2 percent. The last time the Fed raised its rates was nine months ago. It had been kept near zero since the recession.
At the time, the Fed foresaw four additional rate increases in 2016.
Mirroring the market’s swings, the CBOE Volatility index, known as Wall Street’s “fear gauge”, was trading at a 7-week high of 14.15, up 9.2 percent.
“Future policymakers could find that they are not adequate to deal with deep and prolonged economic downturns”, Yellen said, and may need to look at some of the more adventurous ideas under discussion.
While the market still sees the prospects of a rate hike by the Fed in December, “this time previous year the market was expecting to see three or four rate hikes in 2016 and we’ve yet to see one”, he said.
Yellen said that the case for an interest-rate hike “has strengthened in recent months”. But he said that would depend on the strength of forthcoming economic data.
After today’s remarks, there is now an increasing possibility that the Fed may even act as early as the meeting in September or October. The odds of a hike in September rose to 33 per cent following the comments, from 21 per cent on Thursday, according to CME Group’s FedWatch tool. In 2010, for example, Chairman Ben Bernanke signaled that the Fed was considering a new round of bond purchases to try to help a struggling economy emerge from the wreckage of the Great Recession.
By raising the interest rates, the Fed would make it more expensive to borrow money and more profitable to lend money. But she said those options would require more study.
The Fed’s thinking stems from a trickle-down notion of monetary policy that suggests great financial wealth leads directly to higher investment in the real economy, Gross said on CNBC’s “Power Lunch “. Growth hasn’t topped 3% for a full year since 2005.
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“The monetary stimulus and negative interest rate policies of several central banks outside the U.S. continue to drive demand for U.S. Treasury bonds as investors search for positive yields, despite abating concerns over the fallout from Brexit”, Fleming said.
