NEW YORK, Aug 26 (Reuters) – U.S (Other OTC: UBGXF – news). stocks gave up early gains in choppy trading on Friday, hurt by a surging USA dollar as investors grappled with the possible timing of an interest rate hike after comments from several Federal Reserve officials, including Chair Janet Yellen.
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Fed Reserve Chair Janet Yellen’s speech on “The Federal Reserve’s Monetary Policy Toolkit” provided valuable insights into her view of current economic conditions.
The Fed adopted a 2 percent inflation target in January 2012 and except for a brief period that year, it has fallen short of achieving that goal.
But I think the most interesting thing to come out of Yellen’s speech is a fan chart showing the absolutely massive range of outcomes shared by members of the Federal Open Market Committee (FOMC), the Fed group that votes on and sets monetary policy in the US.
“And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course”, Yellen said Friday.
While Fed policy has been credited with helping unemployment fall to levels seen prior to the downturn, trillions of dollars of quantitative easing and eight years or zero or near-zero rates have failed to spark a rebound in economic growth.
The greenback hit 1-week highs against the euro and yen and was last up 0.51 percent at $95.264 versus a basket of major currencies.
In December, the Fed raised its benchmark rate modestly in response to a brighter economic picture, notably a job market nearing full health. USA stocks, which had been higher, then fell. Others say they foresee no action until December, after the elections, in at the earliest.
Yellen said the Fed anticipates “inflation rising to 2 percent over the next few years”.
“That will probably weigh in our decision, along with other data that may come in”, Fischer said in an interview on CNBC. This is why we must think in terms of probabilities rather than absolutes.
A split within the Fed over whether to hike rates soon or take a more cautious approach also has muddied the waters.
The timing from here will remain contingent on the flow of economic data in the U.S. – particularly employment data – and ongoing market stability.
“She’s certainly tried to make a case, but the market doesn’t believe that the Fed is going to actually raise rates”, said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management.
Some have said that if the Fed does decide to act in September, it would need to further prepare investors.
The Fed also has policy meetings scheduled in September and November, with prices for fed funds futures implying investors see much lower chances of a rate increase at either of those meetings.
A recession at that point, she said, would mean that “asset purchases and forward guidance might have to be pushed to extremes to compensate”. But even more noteworthy is that Yellen, while issuing the usual blandishments about how the economy is improving, nearly casually lets slip that the Fed may need to find new ways for mainlining money into the financial system. Currently, such purchases are against the Fed’s charter; such a move would require a change in the law, as she acknowledged.
Yellen said that while the Fed’s support had been critical in supporting the economy, political leaders should considering using the government’s tax and spending powers as well. But it nevertheless adds the considerable weight of her office to rumblings about US monetary policy action this fall.
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Based on recent history, it wouldn’t take much to put them back on hold.
