In an interview with CNBC Friday, Federal Reserve Vice Chair Stanley Fischer said that a September rate increase was very much on the table and that the next jobs report will factor into the decision.
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U.S. stocks closed lower in choppy trading and the USA dollar surged on Friday as investors grappled with the possible timing of an interest rate hike after comments from several Federal Reserve officials, including Chair Janet Yellen.
David Jones, chief economist at DMJ Advisors, agreed that the chances of a September rate hike are rising, especially if forthcoming economic data, including next week’s jobs report for August, show strength. She also reiterated that the decision on interest rates will “always depend on the degree to which incoming data continues to confirm the Fed policy committee’s outlook”.
A rate hike is possible at the Fed’s next policy meetings in September, November and December. The probability of a hike at the September 21 Fed meeting has risen to 38 percent from 15 percent two weeks ago, according to data compiled by Bloomberg.
Investors seem to have been cheered by Ms. Yellen’s modest optimism about the economic outlook. In the weekly Freddie Mac mortgage rate survey, the average 30-year fixed rate was 3.43 percent, just 12 basis points above its all-time low, and it has been below 3.5 percent for nine straight weeks. She was, however, disappointed that business investment had remained low and that exports continued to be restrained amid the appreciation of the dollar since mid-2014.
“We think most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2% target, with a December move still appearing the most likely outcome”, said Andrew Hunter, an economist with Capital Economics.
The Fed leader suggested that internal forecasts for the outlook have been steady since officials at the central bank last wrote down their projections for growth, unemployment and inflation.
By contrast, David Reifschneider, a special adviser to Fed governors, argued in a paper that “even in the event of a fairly severe recession, asset purchases and forward guidance should be able to compensate” for the Fed’s limited scope to reduce short-term rates.
“I believe the case for an increase in the federal funds rate has strengthened in recent months”, Yellen said.
Her first public comments in two months signaled to financial markets that central bank policymakers could nudge up the benchmark federal funds rate as soon as next month.
The rally has sputtered in the second half as signs of an improving US economy rekindled rate concerns, prompting some investors to rein in bullish bets. As of June, for example, the median estimate among them for the federal-funds rate at the end of 2017 was 1.625% and the median estimate for 2018 was 2.375%. “Yellen’s remarks are consistent with our baseline of a December rate hike”.
Fears of it redundancy were “exaggerated”, she said.
But to combat future downturns, she said the Fed should explore other options, too. The rate declined to near zero in 2008 in an unprecedented attempt to stimulate economic growth.
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Bond prices fell. The yield on the 10-year Treasury note rose to 1.58 percent. She made clear the Fed should retain those new tools.
