Case for US interest-rate hike has strengthened, says Fed's Yellen
By Alexander Bueso
Date: Friday 26 Aug 2016
(ShareCast News) - The case for an increase in US interest rates has strengthened in recent months, US Federal Reserve chair Janet Yellen said.
Nevertheless, the outlook was "uncertain" and policy was not on a pre-set course, she added.
"In light of the continued solid performance of the labor 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," she said in a prepared speech.
In an immediate reaction, the yield on the benchmark two-year US Treasury note moved higher by two basis points to 0.81%. However, by 15:48 BST, it was dipping by one basis point to 0.7756%.
Yellen continued: "The [Fed] expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years.
"Based on this economic outlook, the [Fed] continues to anticipate gradual increases in the federal funds rate will be appropriate over time."
Her reference to "over the next few years" triggered some market-chatter to the effect that perhaps Yellen might not have been as hawkish as it initially appeared.
One analyst, speaking on Bloomberg TV, emphasised that what truly mattered was not what the Fed did with short-term rates but what it did with its balance sheet.
Since the 2008 financial crash the Fed's balance sheet had increased in size by nearly a factor of nine to $4.5trn, data from the US Federal Reserve showed.
Oanda senior market analyst Craig Erlam said Yellen's words at Jackson Hole today did not necessarily "offer much in the way of surprises but it did confirm one thing, there is now a clear and public hawkish consensus building within the Fed and chair Yellen is on board."
A hike in September might be possible Erlam said, were it not because prior to Friday markets had all but priced it out, so the Fed would need something "substantial to get them on board". Hence, he believed December might make more sense - followed by another hike in the first half of next year.
Pantheon Macroeconomics chief economist Ian Shepherdson said that with inflation still below the target, "action remains contingent on the data, and our expectation of an abrupt slowing in hourly earnings growth in August - temporary, and due solely to calendar effects - means the next employment report is unlikely to send an unambiguous message that the Fed should hike immediately. We still think Dec is more likely."
Markets' focus would now turn to the upcoming release of the US personal consumption expenditures price deflator - the Fed's preferred price gauge - and monthly jobs report on 29 August and 2 September, respectively, said SpreadCo senior market strategist David Morrison.
Also worth noting, in a departure from standard practice, Yellen referenced so-called 'fan charts' showing the spread of probabilities that markets attached the possibility of rate hikes in the year ahead, much as the Bank of England does.
The odds of rates being between zero and 3.25% by the end of 2017 stood at 70%.
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