Federal Reserve Chair Janet Yellen raised the possibility that future policymakers might increase their inflation target and broaden the types of assets they can buy to enhance their ability to counteract a severe recession. Yellen is to address the gathering on Friday. She, however, failed to disclose the timing of the potential rate hike.
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She added that the FOMC expected the inflation to rise to 2% over the next few years. The September Federal Open Market Committee (FOMC) could be too close for comfort for US policy makers as there is little urgency in raising rates in a global low rate environment.
“Anything that’s not going to be straight-out dovish is going to be disappointing”, she said. And in our view, Yellen sent a similar message to markets today – making an official rate hike at the upcoming September Fed meeting a very high probability (barring a surprising slump in August payrolls).
Elsewhere in commodities, the December gold contract advanced $1.30 at US$1,325.90 an ounce, October natural gas went up 2.8 cents to US$2.91 per mmBTU and September copper contracts remained relatively unchanged.
In Asia, Japan’s Nikkei 225 fell 1.2 percent after consumer prices fell the most in three years in July. The rate had been kept at a record low near zero since the depths of the 2008 financial crisis.
At the time, the Fed foresaw four additional rate increases in 2016.
For now, the US presidential election is not a concern for markets, though comments from Democrat Hillary Clinton about Mylan’s pricing of EpiPen hit that stock hard and sent the S&P health-care sector lower.
Some economists have said they think conditions are ripe for the Fed to boost rates next month.
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. The jobs report could be enough to swing expectations even further into the camp of a September rate move, Ms. Krosby said. “We think the evidence is that the economy has strengthened”.
Fischer said it was still possible that the Fed could raise rates twice before year’s end.
By contrast, the Bank of England cut rates in the United Kingdom from 0.5 per cent to 0.25 per cent this month, and has not raised rates since 2007.
The odds of a hike in September climbed to 30 per cent from 21 per cent on Thursday, according to CME Group’s FedWatch tool.
Nearly a decade of ultra-low interest rates has helped propel stock prices to record highs, even as the economy expands at a lukewarm rate and US largecaps struggle with over a year of declining earnings.
She reiterated the Fed’s desire for fiscal policy to deal with severe economic downturns.
By raising the interest rates, the Fed would make it more expensive to borrow money and more profitable to lend money.
“Finally, and most ambitiously, as a society we should explore ways to raise productivity growth”, Yellen said. She said efforts need to be made, in particular, to boost the productivity of USA workers.
“We are reasonably close to what is thought as full employment and the inflation rate is higher this year than last year’s”, Dr Fischer said.
Yellen was the lead-off speaker Friday for the annual conference sponsored by the Federal Reserve Bank of Kansas City.
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“The overall takeaway, not just from Yellen but for the week, is that all the Fed officials – the voter and no-voter alike – have all taken a hawkish bent”.
