“Yellen said the case for raising rates has strengthened of late but gave no fresh indication about the key question hanging over markets – will the Fed hike in September?”
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Bond prices fell. The yield on the 10-year Treasury note rose to 1.58 percent.
In a footnote she referred to recent Fed research indicating that a bad downturn that begins when rates are low could require the Fed to take on another $4 trillion in assets, doubling its current balance sheet.
Yellen “is opening the door” for the eventual consideration of new policy options for the Fed, said Laura Rosner, senior US economist at BNP Paribas in NY.
“That said, these tools are not a panacea, and future policy makers could find that they are not adequate to deal with deep and prolonged economic downturns”, she told the conference sponsored by the Kansas City Fed.
Yellen is the lead-off speaker Friday for an annual conference attended by members of the Fed’s board of governors in Washington, officials from the Fed’s 12 regional banks and monetary leaders from around the world.
Fischer said it was still possible that the Fed could raise rates twice before year’s end. They’re anxious that if rates don’t rise they’ll be left without their best tool – lowering the rate – when the next economic downturn hits.
Ms. Yellen said her worries had dissipated, thanks in part to “solid” consumer spending and a job market rebound after a spring slump in hiring.
Quincy Krosby, market strategist at Prudential Financial said that Yellen acknowledged “that growth has strengthened but “was careful not to commit to a specific timeline”. The evolution of these forecasts helps drive Fed decisions about rates.
She also noted that while inflation is still running below the Fed’s 2 percent target, it’s being depressed mainly by temporary factors. The market sees the likelihood of a rate increase in December at 58% from 52% the day prior. To ease the impact of the recession, for example, she said the Fed had effectively used bond purchases to reduce long-term borrowing rates and had assured investors that short-term rates would stay low.
“The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted”, she said.
Currently, the Fed projects it will raise rates twice this year, though Fed officials have only been talking about one increase in recent weeks. With rates so low, the Fed has little room to cut them if the economy sinks now.
Because slower growth means future U.S. interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates.
“Our ability to predict how the federal funds rate will evolve over time is quite limited”, Yellen said, explaining the chart that put the expected rate path released by the Fed in June in the middle of a broad set of likely outcomes.
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Other tools developed by the Fed-including payments it makes to banks on the reserves they deposit with the central bank-could be another long-run feature of Fed policy.
