Federal Reserve

Fed’s Yellen sees rate hikes, but June liftoff murky as focus turns to July or even later

PUBLISHED : Tuesday, 07 June, 2016, 1:55am
UPDATED : Tuesday, 07 June, 2016, 1:55am

Federal Reserve Chair Janet Yellen said on Monday that interest rate hikes are likely on the way because “positive economic forces have outweighed the negative” for the United States now that risks from earlier this year have diminished.

In the last public comment from any U.S. central banker before a key policy meeting next week, the Fed chief said last month’s jobs report was “disappointing” and bears watching, though she warned against attaching too much significance to it on its own.

Yellen was careful not to give timelines on raising interest rates, in contrast to a speech on May 27, when she said “probably in coming months such a move would be appropriate.”

While stressing that surprises could emerge that could change her expectations, the speech was broadly buoyant, with Yellen listing four main risks to the US economy - slower demand and productivity, and inflation and overseas risks - before downplaying them all.

“If incoming data are consistent with labour market conditions strengthening and inflation making progress toward our 2 per cent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” Yellen said at the World Affairs Council of Philadelphia.

The US central bank raised rates from near zero in December in the first U.S. policy tightening in nearly a decade.

Prospects of another hike this month were all but killed by a report last week showing only 38,000 jobs were created in May, somewhat muting recent upbeat data on consumer spending, housing and overall US growth.

Although the report was “concerning, let me emphasise that one should never attach too much significance to any single monthly report,” Yellen said. “Other timely indicators from the labour market have been more positive.”

Amid the “countervailing forces,” she said, “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately.”

Two other US central bankers on Monday joined a chorus of policymakers all but dismissing the possibility of an interest-rate hike next week, but professing their continued belief a rate hike soon after will be possible.

Federal Reserve Bank of Atlanta President Dennis Lockhart believes the US central bank should wait until July before considering whether to hike rates, citing a weak May jobs report and potential disruptions from Britain’s June 23 vote on whether to leave the European Union.

Lockhart said he believed there could be two rate hikes between now and the end of 2016.

St. Louis Fed President James Bullard, who is a voting member this year, said the dismal jobs report reduces the chance of a rate hike this month, and called for the Fed to have Yellen hold press conferences after every meeting to make markets more aware that a rate hike could take place.

“It’s possible we could move there, and that would kind of placate my concerns over this issue,” Bullard told the Wall Street Journal.

Economists now see September or possibly July as the most likely time for a quarter-point policy tightening, while traders in futures markets are betting on later in the year.

The dollar initially rose following Yellen’s comments but later retraced, and financial markets did not give an appreciable signal on whether investors saw more or less chances of a rate hike in the near future. US stock prices were about flat compared to their levels just before the speech.

While Yellen did not repeat her line from a week-and-a-half ago when she said rate hikes would probably be appropriate in coming months, she said she remained optimistic inflation would rise to the Fed’s 2-per cent goal because oil prices had reversed their downward path and the dollar had steadied after a long period of gains.