A solid United States labour market “has strengthened” the case for the first rate increase since last December, Fed chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming.
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Fighting the next recession, she said, would be likely to involve the new tools that the Fed invoked during the financial crisis – not just rate cuts but also asset purchases and forward guidance.
Following US Federal Reserve chair Janet Yellen’s speech earlier in the day, her number two at the Fed, vice-chair Stanley Fischer, told CNBC her comments were consistent with a possible September hike and two rate hikes before 2016 was out.
Dudley said in an interview last week that he believes “we’re edging closer towards the point in time where it’ll be appropriate to raise interest rates further”. That was when it raised its benchmark lending rate from near zero, where it had been since the depths of the financial crisis in 2008.
In overseas stock markets, Asian stocks edged lower after Federal Reserve Chairwoman Janet Yellen on Friday, 26 August 2016 signaled the possibility of an interest-rate increase later this year but Japanese shares bucked the trend, boosted by a relatively weaker yen.
“The outlook for USA monetary policy remains the key driver of the NZD and an assumed Fed hike later in the year, most probably December, is required to get the currency back down towards the 0.70 mark”.
Some economists say they think Yellen will alert investors Friday that the central bank might be inclined to act in September. Given that inventories were the main drag on 2Q GDP this should be a bit of a concern for those expecting an imminent September rate hike.
Yellen, in her keynote address at the Kansas City Fed’s annual mountain retreat, said that additional tools remain “subjects for research” and were not being actively considered.
“A rate move in the short term may not be that welcome by the equities side but from a global growth perspective, it does anchor United States as the engine of growth”, said Song Seng Wun, an economist at CIMB Private Banking in Singapore.
“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market”, Mrs Yellen said in her remarks. She added that the FOMC expected the inflation to rise to 2% over the next few years. She said efforts need to be made, in particular, to boost the productivity of US workers.
One market that will be watching the Fed decision closely is Hong Kong, which pegs its currency to the United States dollar. Productivity growth has weakened sharply in recent years and has been a major factor in holding the economy back.
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“Our communities are being sacrificed for an inflation enemy that isn’t here”, said Rod Adams, a community organizer for Neighborhoods for Change in Minnesota.
