Stronger case now for interest rate hike: Yellen

Caution before Yellen's Jackson Hole speech crimps risk appetites

U.S. Federal Reserve Chair Janet Yellen said on Friday that the case for another interest rate hike has strengthened as the U.S. economy and labor market continue to improve.

Ms Yellen, who spoke just 90 minutes after US Commerce Department data showed sluggish growth in the second quarter, did not indicate when the central bank might raise rates, but her comments reinforced the view that such a move could come later this year. She also described consumer spending as “solid”, but noted that business investment was weak and exports were taking a hit from a strong US dollar.

She also noted that while inflation is still running below the Fed’s 2% target, it’s being depressed mainly by temporary factors.

But the Fed chief said the US economy was creating a lot of new jobs and would likely keep growing moderately, despite data earlier in the day showing only sluggish growth in the second quarter. That was when it raised its benchmark lending rate from near zero, where it had been since the depths of the financial crisis in 2008.

The stock market’s key averages were mixed at midday Friday after release of the prepared remarks, having recently hit new record highs. “I think she’ll be saying it is looking like they will raise rates in the not too distant future but won’t tie her hands further than that”.

Asked whether people should “be on the edge of our seat” for a rate hike in September and for more than one policy tightening before the end of the year, Fischer said, “I think what the Chair said today was consistent with answering yes to both of your questions”. Citing continued expansion in US economic activity, especially housing spending, plus an inflation rate running below the FOMC’s desired two percent level, Yellen wondered aloud if this was the right time for another rate increase.

Global volatility, including Britain’s decision in June to leave the European Union, has driven investors to U.S. Treasury bonds and depressed 10-year Treasury yields, said Mark Fleming, chief economist for First American Corp.

Dudley had said last week a rate hike was possible soon, maybe even in September, and Fischer had said over the weekend that the Fed was close to meeting its objectives.

BOND REACTION: After initially rising after Yellen’s speech, US government bond prices fell.

Powell also referenced strength in the United States dollar as an important factor when considering when to tighten policy, a point that was also made by the president of the St.Louis Fed, James Bullard, earlier in the same day. But she said those options would require more study.

During a highly anticipated speech in Jackson Hole, Wyoming, the Federal Reserve chairman hailed the strength of the world’s biggest economy in the face of global headwinds.

That’s a very direct statement – unusually so for the Fed leader.

Yellen, however, was more positive about labor market conditions, economic growth and the general outlook of the economy in her speech Friday.

“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.

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