Stocks were mostly lower on Wall Street in afternoon trading on Friday, giving up modest gains following a generally upbeat assessment of the economy from Fed Chair Janet Yellen. And some have said that if the Fed does decide to act in September, it would need to further prepare investors.
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Ms Yellen was speaking at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut rates to near zero and flooded banks with money.
A government report released today showed that the USA economy has expanded slower than previously estimated in the second quarter, as businesses are running down their inventories faster and state and local governments have reduced their spending.
Phone companies and utilities, which would suffer if interest rates rose and investors looked elsewhere for income, fell more than the rest of the market. The economy is “nearing” the Fed’s goals of full employment and stable prices, share said.
Earlier Friday, gold gained more than 1% on Friday, breaking a five-day streak lower after Fed Chair Janet Yellen said the case for raising USA interest rates has strengthened, although increases should be gradual.
With no strong inflationary tendencies, the Fed can continue at a gradual pace and guide market expectations accordingly, said economists at the Institute of International Finance (IIF) Friday in a report, expecting one rate hike in December and two more in 2017.
“Janet Yellen’s making it very clear, rates are on the rise”, said Mark Williams, a finance professor at Boston University.
The odds of an interest rate increase in September climbed to 40 percent, from 32 percent on Thursday, according to Fed funds data. Investors see much smaller chances of hikes in September or November. But since then, global economic pressures, financial market turmoil and a brief slump in the USA job market have kept the Fed on the sidelines. The Dow lost 19.56 points to 18,428.85.
Many other country’s central banks are not now planning to raise rates, due to a sluggish global economy, and many observers question the wisdom of a rate increase by the Fed.
The U.S. currency had given up gains soon after Yellen spoke to central bankers, as she gave no indication that a rate hike was imminent. She also described consumer spending as “solid”, but noted that business investment was weak and exports were taking a hit from a strong US dollar.
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Such a view is “exaggerated”, Ms Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions. She said the Fed still planned to wind down its massive balance sheet, but that such an effort would take time. She also noted that while inflation is still running below the Fed’s target of 2%, it is being depressed mainly by temporary factors.
