The yield on the two-year US government debt rose to the highest level in more than four years after Federal Reserve Chairwoman Janet Yellen signaled an interest-rate increase in December is on the table.
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Wall Street stocks, unable to follow a rally in European and Asian stocks on Wednesday, fell further after Federal Reserve Chair Janet Yellen said the USA economy is “performing well” and could justify an interest rate hike in December. However, she told lawmakers no decision has been made.
The chances for a December rate hike are now perceived as higher than 50 percent after Yellen laid out what appeared to be the base case that the economy is ready for higher rates. A rate hike, regardless of its timing, will be a significant change in the Fed’s policy stance, which has kept interests at record lows since the global financial crisis struck in 2008.
Scotiabank economist Derek Holt agrees that incremental data will matter to the Fed, particularly the job numbers.
“Domestic spending has been growing at a solid pace” and if the data continue to point to growth and firmer prices, a December rate hike would be a “live possibility”, she said in response to a question from Representative Carolyn Maloney, a NY Democrat.
William Dudley, president of the NY Fed, said later on Wednesday that December “is a live possibility, but we’ll see what the data shows”. The Nasdaq Composite Index fell 0.2 percent. During her comments, the dollar hit its highest level against the euro since late July and set a two-month high against the Japanese yen.
And all of this is the result of the idea that the Fed may raise rates a measly quarter point after nearly 10 years of basically zero; after years of quantitative easing here and still plenty of quantitative easing overseas. The Federal Reserve’s prime interest rate controls how much interest banks have to pay when borrowing from one another.
The economic outlook was further brightened by another report on Wednesday showing the trade deficit hit a seven-month low in September as exports rebounded, a tentative sign the worst of the drag from the stronger dollar may be over.
“Bullion weakened after perceivably hawkish monetary policy comments by…”
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“All of this pressure has been due to the increasing expectations for the Fed to move in December”, said David Meger, director of metals trading for Vision Financial Markets in Chicago.
