Instead, she stressed, as she frequently has, that the Fed’s rate decisions will depend on whether the freshest economic data continues to confirm its outlook.
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Commenting on Yellen’s speech, Subadra Rajappa, head of rates strategy at Societe Generale, was cited by the BBC as saying, “We weren’t really expecting her to signal a hike at the September meeting, but she’s just kept the door open for a hike sooner rather than later”.
At the time, the Fed foresaw four additional rate increases in 2016.
Ms. Yellen’s seeming reliance on more quantitative easing was challenged at Jackson Hole by Marvin Goodfriend, a professor of economics at Carnegie Mellon University and a former policy adviser at the Richmond Federal Reserve bank, who said he believed negative rates would be a far more effective policy tool. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed’s December policy meeting.
The conference’s theme is “Designing Resilient Monetary Policy Frameworks for the Future”, reflecting concern that the global economy has become trapped in a slump of low growth and low inflation and uncertainty about how central banks should respond.
“I think that the Fed wants to get the market to start pricing in a hike for this year, which they weren’t doing earlier, and now I’m seeing the probability of a hike by December has gone up slightly over a coin toss”. But about 71 percent of 62 economists surveyed by the Wall Street Journal this month believed that the Fed would wait until December to raise rates.
Based on these projections, the central bank anticipates gradual increases in the federal funds rate over time. The rate had been kept near zero since the depths of the 2008 financial crisis. But since then, global economic pressures, financial market turmoil and a brief slump in the US job market have kept the Fed on the sidelines.
David Jones, chief economist at DMJ Advisors, said this week that he thought the chances of a September rate hike are rising, especially if forthcoming economic data, including next week’s jobs report for August, show strength. Low rates encourage borrowing and risk-taking, which can bolster economic growth.
However she also sketched a future in which much will remain unsettled.
Meanwhile, the Fed is wrestling with more existential questions, including whether the slow growth that has dogged the recovery for the past seven years is here to stay.
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.
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“The number of new homes sold but not yet started rose to the highest level in almost nine years suggesting residential construction should remain a positive contributor to growth in Q3”, said Sophia Kearney-Lederman, an economic analyst at FTN Financial. The group of policy activists, labor unions and community groups has been lobbying the Fed to keep rates low to allow the economy to strengthen enough to benefit more Americans.
