News analysis

Fed sends out stronger signals of rate hike next month

The Federal Reserve's stimulus campaign has encouraged borrowing and risk-taking, contributing to economic recovery and job growth in the US.
The Federal Reserve's stimulus campaign has encouraged borrowing and risk-taking, contributing to economic recovery and job growth in the US.PHOTO: AGENCE FRANCE-PRESSE

WASHINGTON • The US dollar rose but bonds fell and gold traded lower as senior Federal Reserve officials hammered home the message in public remarks that the benchmark interest rate could rise next month if economic growth continues.

Fed chair Janet Yellen and New York Fed president William Dudley both said the central bank could boost interest rates as soon as next month, while Fed vice-chairman Stanley Fischer voiced confidence that inflation was not too far below the central bank's goal.

"At this point, I see the US economy as performing well,"

Dr Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington.

If economic data continues to point to growth and firmer prices, a December rate hike would be a "live possibility", she said.

The remarks come as fresh data on the vast US service sector on Wednesday supported the view that the economy was on the upswing.

Bolstered by the comments, the US dollar hit a three-month high against a basket of major currencies yesterday.

But the rise hurt gold's allure as the metal traded near a one-month low. Gold dropped to US$1,109.19 an ounce at 3.13pm in Singapore from US$1,118 on Wednesday.

Bonds fell around the world as traders increased the odds of a rate hike to more than 50 per cent.

"Bond yields are rising around the world in sympathy with Treasuries," said Diam debt money manager Hajime Nagata in Tokyo.

"The market is reaffirming that the Fed will lift off in December."

Yields on two-year Treasury securities, closely tied to expectations about Fed policy, climbed to 0.84 per cent, the highest level since 2011.

In effect, that means the Fed is already starting to tighten financial conditions even as officials wrestle over how soon to end a stretch of nearly seven years of near-zero short-term rates.

Treasuries are driving borrowing cost higher even as economic growth slows in China and as central bankers in Europe and Japan signal that they may increase their debt purchase programmes.

The Fed's stimulus campaign has encouraged borrowing and risk-taking, which officials say have contributed to economic recovery and job growth. Those benefits will diminish as rates rise.

High-yield, riskier emerging currencies have been hit hard this year on fears of a flight of capital back to the US, as dealers look for better, safer investments on the back of the looming US rate lift-off.

The US Labour Department will probably say today that US employers added 182,000 jobs last month, compared with 142,000 in September, according to economists.

BLOOMBERG, NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on November 06, 2015, with the headline 'Fed sends out stronger signals of rate hike next month'. Print Edition | Subscribe