Investors now see an 18 per cent probability the Fed will raise rates at its September policy meeting and a 53 per cent chance of an increase by December, according to futures data.
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“…in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”
But she did not give guidance on what the central bank needs to see before raising rates.
Yellen offered no specific timetable for a rate increase in a speech at the Kansas City Fed’s annual retreat in Jackson Hole, Wyo (http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26). Nevertheless, Friday’s speech indicates that a rate increase may indeed be coming sooner rather than later.
After Yellen’s comments, gold prices spiked around $20, rising in lockstep with U.S. equities. That has kept interest rates low in the US and helped lift risk assets, but it also makes it more precarious for the Fed if the dollar shoots higher.
Still, Yellen declined to hint at whether the Fed might raise rates at its next policy meeting, September 20-21, or at its subsequent meetings in early November and mid-December.
Yellen’s remarks initially touched off rises early in the trading day.
In individual stocks, chip maker Intel led the action on the Dow blue chip list, gaining 1.2 percent.
Gold stocks jumped on a 1.1 percent gain in the gold price. She said current forecasts imply a 70% probability they will be between 0% and 3.75% at the end of 2017.
Yellen was speaking at a Fed conference where central bankers gathered to hear new ideas on how to stimulate economies even after officials have cut rates to near zero and flooded banks with money.
Some analysts have suggested the Fed will have less flexibility to fight future recessions because there will be less room to cut rates. She, however, failed to disclose the timing of the potential rate hike.
“I think Stanley Fischer is trying to keep the market honest and his comments regarding September being on the table and two rate increases still a possibility are a great example of what is “technically true” versus what is a likely outcome”, said Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners. Yellen added that the balance sheet was likely to be useful for policy for some time.
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However, going forward, she said the Federal Open Market Committee (FOMC) expected a moderate GDP growth and an improvement in the labour market.
