Fed’s Yellen sees stronger case for interest rate hike

Monday, 29 August 2016 00:01 - - {{hitsCtrl.values.hits}}

Fed chief leaves door open for policy tightening

Fischer signals September rate hike on the table

Investors skeptical higher rates imminent

Jackson Hole, Wyo. (Reuters): The Federal Reserve is getting closer to raising interest rates again, the head of the US Central Bank and other policymakers said on Friday in comments that left the door open for a hike as early as next month.

Fed Chair Janet Yellen told a global monetary policy conference that the case for a rate increase had grown stronger, 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.

Although US Government data earlier on Friday showed the economy growing only sluggishly in the second quarter, Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace.

“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.

Yellen said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices, and she described consumer spending as “solid” while noting business investment was weak and exports had been hurt by a strong US dollar.

But she did not give guidance on what the central bank needs to see before raising rates. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed’s December policy meeting.

“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.

In an interview with CNBC after Yellen’s speech, Fischer, the central bank’s No. 2 official, said 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.

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, Fischer said: “I think what the Chair said today was consistent with answering yes to both of your questions.”

Atlanta Fed President Dennis Lockhart also said on Friday that two rate hikes were possible this year, and Cleveland Fed President Loretta Mester argued for a hike soon to avoid falling behind the curve on inflation.

The Fed officials’ comments pushed the dollar higher against a basket of currencies. US stock prices see-sawed, ending the trading session generally lower, while prices of US Treasuries were mostly weaker.

Markets remained skeptical of the Fed’s rate hike projections largely because of the perceived wide gap between what it has signaled and ultimately delivered. The Fed raised rates in December for the first time in nearly a decade and projected another four hikes in 2016, only to scale that back to two moves in the wake of a global growth slowdown, financial market volatility and slow progress in meeting its 2 percent inflation goal.

A split within the Fed over whether to hike rates soon or take a more cautious approach also has muddied the waters.