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Federal Reserve

Fed’s Yellen suggests US rate liftoff increasingly likely as economy picks up steam

Bets by market players on likely rate rise hits 34 per cent in June but jumps to 60 per cent in July

PUBLISHED : Saturday, 28 May, 2016, 3:43am
UPDATED : Monday, 30 May, 2016, 2:19pm

The Federal Reserve should raise interest rates “in the coming months” if the economy picks up as expected and jobs continue to be generated, US central bank chief Janet Yellen said on Friday, bolstering the case for a rate increase in June or July.

“It’s appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” Yellen said during an appearance at Harvard University.

Although Yellen expressed caution about too steep a rise in US interest rates, she sounded more confident than she has in the past about economic growth and the prospect of inflation edging higher toward the Fed’s 2 per cent target.

“The economy is continuing to improve ... growth looks to be picking up,” Yellen told a group of professors and alumni at the Ivy League college in Cambridge, Massachusetts. She added that she expects the labour market to continue to improve.

Prices for US Treasuries fell after Yellen’s remarks, while stocks rose. The US dollar was trading higher against a basket of currencies.

The probability of a rate hike at the Federal Open Market Committee’s June 14-15 meeting rose to 34 per cent from 30 per cent before Yellen’s remarks, according to CME Group, where the futures contracts are traded.

Bets on a rate increase at the July 26-27 policy meeting hit 60 per cent, more than double the estimate from a month ago.

The Fed raised its key benchmark interest rate in December for the first time in nearly a decade, but has held off since then due to concerns earlier this year about a global economic slowdown and financial market volatility.

“As we look at our place in the global economy, things just seem to be improving to a point where it certainly looks likely that June or July will be the next launching point”
Paul Springmeyer, portfolio manager at the Private Client Reserve of U.S. Bank

Those concerns have subsided somewhat in recent months. In recent weeks, several Fed policymakers have reacted to stronger US economic data and stable financial markets by putting a rate hike squarely on the table for either June or July.

Yellen’s comment on Friday “reinforces the signals on early rate hikes communicated recently by her FOMC colleagues,” Mohamed A. El-Erian, chief economic adviser at Allianz, said via Twitter.

Weak oil prices and a strong dollar have been blamed for helping to keep US inflation below the central bank’s target.

On Friday, Yellen said those factors “seem like they are roughly stabilising at this point and my own expectation is that ... inflation will move back up over the next couple of years to our 2 per cent objective.”

The economy has not seen “much improvement in wage growth which is suggestive of some slack in the labour market,” Yellen added.

Wall Street rose on Friday and was headed for its strongest week since March after Yellens’ remarks, the most important voice in a chorus of policymakers recently suggesting that the US economy has improved enough to warrant tighter borrowing costs, with a growing number of investors now expecting a hike in June or July.

While higher interest rates choke liquidity in stock markets, many investors see a potential rate hike as a vote of confidence that the struggling US economy is finding its legs.

“As we look at our place in the global economy, things just seem to be improving to a point where it certainly looks likely that June or July will be the next launching point,” said Paul Springmeyer, portfolio manager at the Private Client Reserve of U.S. Bank.

“With the increased strength, we should get up off of those historically low levels where we are.”

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