United States stocks rise as Yellen points to early rate hike

Caution before Yellen's Jackson Hole speech crimps risk appetites

The Toronto stock market and Wall Street were higher on Friday morning after Federal Reserve Chair Janet Yellen said the case for raising USA interest rates has strengthened in recent months.

In an interview after the speech, Fed Reserve vice chair Stanley Fischer said Dr Yellen’s comments were consistent with expectations for possible interest rate hikes this year.

In her speech, Yellen voiced optimism about the economy, another key phrase signaling that interest rate hikes are coming in the future.

After all, Yellen said in May that a rate increase would be appropriate over the summer months.

Making its first hike in almost a decade, the US Federal Reserve raised rates last December, but has avoided further increases so far this year owing to the continuing global economic slowdown and volatility in major financial markets.

“Markets were already aware that the case for a rate hike had strengthened – recent economic data has been pretty good, market volatility has been low, and Brexit has not yet produced instability”, said David Donabedian, chief financial officer of Atlantic Trust Private Wealth Management, in a note.

Yellen, speaking at an worldwide gathering of central bankers and academics in Jackson Hole did not say when the US central bank would raise borrowing costs, and investors remained skeptical that such a move was imminent.

“Additional tools may be needed”. However, at that meeting FOMC members indicated that four more hikes were on the way in 2016.

Traders prefer to invest or hold currencies in nations where interest rates are rising – or expected to rise – in the hope of increasing their potential returns.

But low rates were also a key reason behind the stock market’s strong rally over the last seven years.

Her remarks increased the likelihood that the Fed will increase the rate from its current ultra-low 0.25-0.50 percent level by the end of the year, and as early as its next meeting in September.

On the other hand, the second look at second-quarter GDP, released Friday morning, shows annualized growth of just 1.1%, compared to 1.2% in the first estimate.

Fischer added that the August jobs report out next Friday will factor into the Fed’s decision.

“Economic activity continues to expand, led by solid growth in household spending, but business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports”, Yellen said on Friday.

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