Daily Management Review

Stronger Case for Interest Rate Hike seen by Fed's Yellen


08/27/2016




Stronger Case for Interest Rate Hike seen by Fed's Yellen
Leaving the door open for a hike as early as next month, the head of the U.S. central bank and other policymakers said on Friday that the Federal Reserve is getting closer to raising interest rates again.
 
While Fed Vice Chair Stanley Fischer suggested a move could come at the central bank's September policy meeting if the economy was doing well, Fed Chair Janet Yellen told a global monetary policy conference that the case for a rate increase had grown stronger.
 
Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace although U.S. government data earlier on Friday showed the economy growing only sluggishly in the second quarter.
 
"I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said in a speech at the Fed's annual monetary policy conference in Jackson Hole, Wyoming.
 
While noting business investment was weak and exports had been hurt by a strong U.S. dollar, Yellen described consumer spending as "solid" and said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices.
 
However guidance on what the central bank needs to see before raising rates was not given by her. There were roughly even odds of an increase at the Fed's December policy meeting, the investors continued to bet on following her remarks.
 
"She's just kept the door open for a hike sooner rather than later," said Subadra Rajappa, an interest rate strategist at Societe Generale in Washington.
 
The Fed chief's comments were a sign of how close policymakers could be to raising rates if data kept pointing to a good economic outlook, said Fischer, the central bank's No. 2 official in an interview with CNBC after Yellen's speech.
 
Fischer said, "I think what the Chair said today was consistent with answering yes to both of your questions" when 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.
 
While Cleveland Fed President Loretta Mester argued for a hike soon to avoid falling behind the curve on inflation, Atlanta Fed President Dennis Lockhart also said on Friday that two rate hikes were possible this year.
 
While prices of U.S. Treasuries were mostly weaker U.S. stock prices see-sawed, ending the trading session generally lower, and the dollar was pushed higher against a basket of currencies after the Fed officials' comments.
 
Largely because of the perceived wide gap between what it has signaled and ultimately delivered, markets remained skeptical of the Fed's rate hike projections.

The Fed projected another four hikes in 2016, only to scale that back to two moves after it raised rates in December for the first time in nearly a decade. Slow progress in meeting its 2 percent inflation goal, financial market volatility and a global growth slowdown were the reasons for the scale back.
 
There have also been reports of a split within the Fed over whether to hike rates soon or take a more cautious approach.
 
The central bank could afford to be patient and that he wanted to see inflation rise before lifting rates, Fed Governor Jerome Powell said on Friday
 
"When we see progress toward 2 percent inflation and a tightening in the labor market and growth strong enough to support all that, we should take the opportunity," Powell said.
 
(Source:www.reuters.com) 






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