She also noted that while inflation is still running below the Fed’s 2 percent target, it’s being depressed mainly by temporary factors.
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While the market still sees the prospects of a rate hike by the Fed in December, “this time a year ago the market was expecting to see three or four rate hikes in 2016 and we’ve yet to see one”, he said.
Ms Mester declined to say what her decision would be at the Fed’s September meeting, saying she wanted to review all the economic data at that time and listen to her colleagues. She said the Fed is not actively considering additional policy tools but participants at the conference suggested the process is already well underway.
Stocks later traded lower after hawkish comments from Fed Vice Chair Stanley Fischer raised the possibility of a rate hike as soon as next month. Fed officials agreed to meet with an activist group, Fed Up, that wants the Fed to guarantee full employment for blacks, appoint more blacks and Hispanics to top positions, and tackle inequality.
Expectations for higher interest rates would likely continue a recent trend of investors selling high-dividend payers like utilities and telecoms, in favor of sectors tied to economic expansion like financials and industrials. “Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy”, Yellen said. 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. 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.
“If we get a really strong employment report, say 200,000 plus, with a much higher wage growth, then they would find it very hard to resist a hike, probably in September, but definitely by December”, Mohamed El-Erian, Allianz SE’s chief economic adviser said to Bloomberg.
If productivity and economic growth remain low and world savings rates remain high, she said it is conceivable the Fed is never able to raise the policy rate beyond 2.0 percent, leaving the central bank anchored uncomfortably close to zero.
Still, some Asian nations would be willing to sacrifice capital outflows in exchange for the boost in export competitiveness that a weaker currency would provide, Yeung said. But he said that would depend on the strength of forthcoming economic data.
“Investors are not pricing in a Fed tightening”, said Swonk, who expects the Fed to take no action until January.
If we believe that USA and European stocks have gotten expensive due to low interest rates, then emerging markets may be next in line for the same somewhat artificial inflation.
In her speech, Yellen explained how the Fed’s previous and present policy actions have helped the U.S. recover from the Great Recession. Low rates encourage borrowing and risk-taking, which can bolster economic growth. Yellen assured these and other global developments would be considered when the Fed makes its future policy decisions. But the Fed chair gave no commitment to begin such a gradual rise next month or even this year. “So, there is not much room for a negative surprise anymore”, said Maarten-Jan Bakkum, senior strategist (emerging markets), NN Investment Partners (NN IP) based in Netherlands.
In 2010, the year after the U.S. economy emerged from recession, the midpoint of Fed policymakers’ predictions was for 3.3 per cent growth in 2011.
Yellen on Friday defended the models used by the Federal Reserve.
In advance of Yellen’s speech Friday, several Fed officials met Thursday with about 120 activists from the Campaign for Popular Democracy’s Fed Up coalition. And has the stock market been propped up by this interest rates?
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“Our communities are being sacrificed for an inflation enemy that isn’t here”, said Rod Adams, a community organizer for Neighborhoods for Change in Minnesota.
