Speaking at a three-day global gathering of central bankers in Jackson Hole, Wyoming, Ms Yellen said: “The US economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability”.
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Stock markets and the loonie had barely moved Thursday in anticipation of Yellen’s speech Friday at the central bank’s annual summer symposium in Jackson Hole, Wyo.
Slower growth in working-age populations, smaller productivity gains and less spending on capital projects were contributing to slower economic growth and lower interest rates around the world, she said. “It is clear that she fundamentally does not want to see any change to the Fed’s policy framework despite the fact that inflation expectations have become de-anchored and markets have lost trust in the Fed really fundamentally wanting to deliver on its 2 percent inflation target”. “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook”.
The gains were all but erased after Fed Vice Chairman Stanley Fischer said her remarks leave open the possibility of boosting rates in September. This had then marked the first rate hike in almost a decade. Then investors began to have second thoughts, wondering if an increase was possible as early as next month, and buyers turned to sellers.
U.S. Treasury prices slumped as investors evaluated whether the Fed is likely to raise rates in September. They’re on track for declines of 1.5 percent and 1.1 percent, respectively.
A split within the Fed over whether to hike rates soon or take a more cautious approach also has muddied the waters.
Dr Fischer said the “big numbers” – employment and inflation – the Fed paid most attention to, were “better than they have been for some time”.
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. Productivity growth has weakened sharply in recent years and has been a major factor in holding the economy back.
Yellen was the lead-off speaker Friday for the annual conference sponsored by the Federal Reserve Bank of Kansas City.
But her comments reinforced the view that such a move could come later this year.
She reiterated the Fed’s desire for fiscal policy to deal with severe economic downturns.
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Mirroring the market’s swings, the CBOE Volatility index.VIX, known as Wall Street’s “fear gauge”, touched a seven-week high of 14.67.
