Stocks were mostly lower on Wall Street at midday, giving up a modest gain following a generally upbeat assessment of the economy from Fed Chair Janet Yellen.
Advertisement
A recession at that point, she said, would mean that “asset purchases and forward guidance might have to be pushed to extremes to compensate”.
The strengthening case for a rate hike comes on the heels of “solid performance” in the labor market and an ever-improving outlook on the domestic economy, Yellen said.
The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December a year ago, the first rate hike in almost a decade.
Europeanequities edged lower on Friday, with investors focusing on a speech by Federal Reserve Chair Janet Yellen later in the session for hints about the timing of a US interest rate hike. Yellen is to address the gathering on Friday. The Fed’s monetary policy was not on a pre-set course, she added. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed’s December policy meeting.
“Our view is that most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2 percent target, with a December move still appearing the most likely outcome” for a rate rise, Capital Economics ventured.
That said, it is likely worrisome for Fed governors that markets seem to be ignoring their threats to raise rates.
The central bank’s balance sheet has swollen in the years since the financial crisis as it bought Treasury and mortgage-backed securities in an effort to nudge rates down and stimulate demand. “They’re not going to be raising rates a lot and it will be gradual rate hikes, which is good for risk assets”. The S&P 500 index showed 29 new 52-week highs and one new lows, while the Nasdaq recorded 108 new highs and 18 new lows. “But under conditions when we’re seeing employment move [higher with] low and stable inflation, I think it’s fair to say we could remove some of that accommodation”.
“The initial headlines after the release of Janet Yellen’s speech definitely caused some knee-jerk reactions in the markets”, Chris Gaffney, the president of EverBank World Markets, said in an email.
OANDA’s Craig Erlam said Yellen’s speech had not really offered up much in the way of surprise.
“And she gently asked Congress to think about how it would respond to the next downturn: “.a wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy”. What’s more, she stressed that decisions would depend on future economic news. The central bank could begin pumping money into the economy again or promise to keep rates lows – two pillars of its response to the Great Recession.
Some have said that if the Fed does decide to act in September, it would need to further prepare investors.
Advertisement
Cutting interest rates into negative territory, as central banks have done in Europe and Asia, carries risks such as encouraging cash hording.
