Stronger case now for interest rate hike: Yellen

Commuters at the L'Enfant Plaza Metro station in Washington, DC. An improved labour market in the US in recent months is adding weight to the argument that it is time for the country's central bank to raise interest rates.
Commuters at the L'Enfant Plaza Metro station in Washington, DC. An improved labour market in the US in recent months is adding weight to the argument that it is time for the country's central bank to raise interest rates. PHOTO: AGENCE FRANCE-PRESSE

But Fed chair does not indicate timing; investors believe it may take place by year end

WASHINGTON • The case for raising United States interest rates has strengthened in recent months because of improvements in the labour market and expectations for moderate economic growth, Federal Reserve chair Janet Yellen said yesterday.

Dr Yellen did not indicate when the US central bank might raise rates, but her comments reinforced the view that such a move could come later this year.

The Fed has policy meetings scheduled in September, November and December. Speaking at a three-day international gathering of central bankers in Wyoming, Dr Yellen said the "US economy was nearing the Federal Reserve's statutory goals of maximum employment and price stability".

"In the light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Dr Yellen said in prepared remarks. She added that the Fed still thinks that future rate increases should be "gradual".

Her comments came as US economic growth was revised to 1.1 per cent for the second quarter, a more sluggish rate than the initial estimate of 1.2 per cent.Markets jumped on her comments with the Dow surging about 80 points following the speech, after briefly paring gains, CNBC reported.

OUTLOOK FOR THE FUTURE

In the light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.

FEDERAL RESERVE CHAIR JANET YELLEN

The Fed raised rates in December, its first hike in nearly a decade, but it has held off further increases so far this year due to a global growth slowdown, financial market volatility and generally tepid US inflation data.

Investors currently see an 18 per cent probability that the Fed will raise rates at its September policy meeting and a 53 per cent chance of an increase in December, according to CME Group's FedWatch tool.

Dr Yellen's comments, by failing to lay out a clear road map for what the Fed needs to see to raise rates, will likely not convince some investors that a rate increase is imminent, in part because Fed policymakers are seen to be sharply divided over whether to increase rates soon or take a more cautious approach.

"The initial headline certainly had everyone thinking that a rate hike in September was possible," said Mr Chris Gaffney, president of EverBank World Markets. "Right now, I don't think the data supports a September hike, and the markets are starting to come to grips with that."

Dr Yellen was speaking yesterday at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut rates to near zero and flooded banks with money.

The market's attention now is going to focus on next Friday's jobs data, Mr Gaffney said.

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 27, 2016, with the headline 'Stronger case now for interest rate hike: Yellen'. Print Edition | Subscribe