US stocks were lower in a choppy session on Friday, with stocks bouncing between gains and losses as investors grappled with the possible timing of a USA interest rate hike after comments from Federal Reserve officials, including Chair Janet Yellen. Elsewhere, the US 10-year Treasury benchmark yield rose 5.9 basis points to its highest level since June 23, as government-bond traders appeared to take seriously the prospect of a rate hike as early as September.
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Although some FOMC members have persistent lingering concerns about inflation, we read Chair Yellen’s comments as in line with other FOMC communication in recent weeks which has consistently sounded hawkish, with most committee members indicating that at least one rate hike this year appears warranted.
The greenback fluctuated between gains and losses earlier after Yellen’s remarks failed initially to increase investors’ confidence in a rate hike by the end of the year, despite her saying that the case for raising interest rates had strengthened in recent months.
In 2010, the year after the US economy emerged from recession, the midpoint of Fed policymakers’ predictions was for 3.3 percent growth in 2011. “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.
The Fed last raised rates nine months ago, the first time it had done so since the 2008 economic downturn. The Fed will meet on September 19-20.
Lisa Kopp, senior vice president at U.S. Bank Wealth Management, said she wasn’t surprised by the selling given the “jitteriness” in the markets. Investors now see an 18 per cent probability the Fed will raise rates at its September policy meeting and a 53 per cent chance of an increase by December, according to futures data.
She said that barring an “unusually severe and persistent” recession, its policy tools were sufficient and rates did not need to go negative, as even at the lower bound for interest rates asset purchases and forward guidance could push long-term rates even lower on average than when nominal rates fell below zero.
Euro zone government bond yields, including Germany’s 10-year bond, fell. If this robust employment expansion was repeated in August, economists said the Fed could raise rates in September. “She suggests the economy is improving, but the GDP numbers for the past three quarters are closer to 1 percent than three percent”.
The odds of a hike in September climbed to 30 percent from 21 percent on Thursday, according to CME Group’s FedWatch tool.
On the long term outlook for monetary policy, Dr Yellen said the Fed’s forecast neutral interest rate was just 3 per cent, less than half the average level between 1965 and 2000.
Some analysts have suggested the Fed will have less flexibility to fight future recessions because there will be less room to cut rates.
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She also noted that while inflation is still running below the Fed’s 2 percent target, it’s being depressed mainly by temporary factors.
