The Fed raised rates for the first time in almost a decade last December, from around zero to between 0.25 per cent and 0.5 per cent, but has kept them there ever since.
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AMP Capital chief economist Shane Oliver said the ASX 200 futures fell four points or 0.1 per cent reflecting the U.S. lead, which points to a soft start to trade on Monday for the Australian share market.
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.
Markets have been watching closely for signs the Fed is ready to start raising USA interest rates, a move that would lift the United States dollar and push down the kiwi.
Although US government data earlier on Friday showed the economy growing only sluggishly in the second quarter, Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace.
Diane Swonk of DS Economics suggested that one reason US stock averages set highs so soon after Britain’s June vote to leave the European Union escalated global economic fears is a belief that the Fed will leave rates alone until perhaps year’s end.
Gold rose as much as 1.6 percent after Yellen said that while the case for a rate hike has strengthened recently, a gradual increase will be appropriate “over time”, initially easing concerns that the Fed would make a move next month.
USA stocks almost flat-lined immediately after Yellen’s comments, but surged soon after, with all 10 major S&P 500 sectors trading higher.
Commenting on Yellen’s speech, Subadra Rajappa, head of rates strategy at Societe Generale, was cited by the BBC as saying, “We weren’t really expecting her to signal a hike at the September meeting, but she’s just kept the door open for a hike sooner rather than later”. She said current forecasts imply a 70 percent probability they will be between 0 percent and 3.75 percent at the end of 2017, and a 70 percent probability they will be between 0 percent and 4.5 percent at the end of 2018.
The odds of an interest rate increase in September climbed to 40 percent, from 32 percent on Thursday, according to Fed funds data. “Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy”, she explained.
The Fed may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.
The Fed officials’ comments pushed the dollar higher against a basket of currencies.
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“The issue of overheating of the economy is being discussed within the Fed board”, Fed Vice Chair Stanley Fischer told a room of labor activists who met with Fed officials to press them not to raise interest rates.
