“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”.
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Stocks rose in early trading Friday, Aug. 26, 2016, following two days of declines after Federal Reserve Chair Janet Yellen gave an upbeat assessment on the US economy. But she stopped short of offering any timetable.
The initial job numbers we saw this June and July were stronger than the initial gains leading up to the 2015 hike.
Yellen, speaking at a conference of monetary officials in Jackson Hole, Wyoming on Friday, said the case for raising interest rates has strengthened given improvements in the economy. It had been kept near zero since the recession.
She, however, also said that future rate increases should be “gradual”.
Fischer, the Fed’s No. 2 policymaker, said the Labor Department’s jobs report for August will likely weigh on the decision over a hike.
David Donabedian, chief financial officer of Atlantic Trust Private Wealth Management, said in a note that the market’s initially positive reaction may have been attributable to “her relaxed view on inflation”, which suggested “a very slow path toward higher rates”. A number of observers, some economists and investors among them, believe the odds are higher for a rate increase at the December meeting or in 2017.
John Briggs, head of strategy at RBS, said the market had expected her to be somewhat hawkish but it took comments from Fischer reinforcing that the economy is improving and the Fed’s objectives are getting closer to emphasize that September is in play.
Fed Vice Chairman Stanley Fischer said Friday that Yellen’s comments were consistent with a potential rate increase in September and another one before the end of the year.
Heading into the speech, investors estimated a 24% chance that the Fed would raise rates in September and a 54% chance that the Fed would hike rates in December, according to CME Group’s FedWatch. She mentioned raising the Fed’s 2 percent inflation target to give it more leeway or possibly expanding the types of assets the Fed could buy beyond Treasurys and mortgage-backed securities.
Her remarks came against differing degrees of short-term “hawkishness” from various Fed officials who were in attendance at the Jackson Hole Economic symposium. Growth hasn’t topped 3% for a full year since 2005.
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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.
