Janet Yellen, chair of the Federal Reserve, indicated Friday at a highly anticipated speech in Jackson Hole, Wyoming, that the central bank may soon raise interest rates in light of a strengthening economy.
The jobs report is issued next Friday. Another solid month of job gains will likely factor into the market’s outlook on monetary policy ahead of the September FOMC meeting.
Still, Yellen declined to say when a rate hike would happen, falling back on what has become a common refrain that the decision would be based on the latest economic data. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed’s December policy meeting.
Traders appeared to see her remarks as a mix of both hawkish and dovish views.
At the end of trading on Friday, stocks on Wall Street and the Australian dollar fell, while bond yields rose as investors pondered the Fed’s next move.
Meanwhile, with the yield curve-the spread between short and longer-dated Treasury yields-the flattest its been since 2008, “any signal that the Fed is approaching the next step of policy normalization, while remaining cautiously behind the USA inflation curve, would carry asymmetric upside risks to US yields”, she said.
Major U.S. indexes initially climbed after a speech by Fed Chair Janet Yellen that was bullish on the economy but gave no timetable for future rate increases. Yields fall as debt prices rise; a basis point is a hundredth of a percentage point. Officials began the year expecting to raise rates four times in quarter-point increments but have delayed moving them because economic growth disappointed in the first half of the year and because they were uncertain about developments overseas and about the strength of the US job market after some soft reports.
Yellen told the gathering of central bankers from around the world the US economy was nearing the central bank’s goals of maximum employment and price stability but she maintained that future hikes should be “gradual”.
Ms. Yellen said: “While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market”.
On the long term outlook for monetary policy, Dr Yellen said the Fed’s forecast neutral interest rate was just 3 per cent, less than half the average level between 1965 and 2000.
That’s a very direct statement – unusually so for the Fed leader. The fate of the September rate hike will rely on the next employment, retail sales and inflation releases.
Fischer said it was still possible that the Fed could raise rates twice before year’s end.
“I believe the case for an increase in the federal funds rate has strengthened in recent months”, Yellen said.
However, weak US GDP data yesterday were followed by more dovish signals from the Fed chair after her speech could see the US dollar come under renewed selling pressure.
The last time the U.S. central bank raised interest rates was at the end of 2015.
“For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide”.
Fears of it redundancy were “exaggerated”, she said. But she said those options would require more study.
Traditionally, the Fed cuts rates in a downturn to spur borrowing, investing and spending.
Yellen said the economy was nearing the central bank’s goals of maximum employment and price stability, but maintained that future hikes should be “gradual”. It also bought treasury securities and mortgage bonds worth trillion of dollars in an attempt to boost the economy.