Yellen says case for rate hike has ‘strengthened’

Added 26th August 2016

Speaking at the annual Jackson Hole symposium, Federal Reserve Chair Janet Yellen said the solid performance of the United States labour market and current economic outlook mean the case for an increase in the federal funds rate has ‘strengthened in recent months.’

Yellen says case for rate hike has ‘strengthened’

Yellen’s synopsis of US economic activity was notably optimistic, despite the fact the services sector posted unimpressive growth in August the day before. In fact the services sector reported its weakest growth in months the day prior.      

Yellen said the solid growth in household spending and steady job gains support the Federal Open Market Committee’s (FOMC) view that the US will see moderate GDP growth, a stronger labour market and hit the 2% inflation target over the next few years.

“Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives,” she said.

However, Yellen stressed that the economic outlook remains uncertain and as a consequence monetary policy is subject to change.

“The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted,” said Yellen. “When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions.”

Not everyone was impressed by Yellen’s Jackson Hole address. Lee Ferridge, head of multi-asset strategy at State Street Global Markets North America, was disappointed that after “recent hints of an ongoing policy rethink at the FOMC, Yellen’s Jackson Hole speech did not break much new ground.”

“Her comments could help arrest the dollar’s recent decline and deal a blow to the rally in risky assets that we have seen in recent weeks," he added. "A move at the September meeting remains less likely but a move before year end now looks a distinct possibility should US data continue to improve.”

Viktor Nossek, director of research at WisdomTree Europe, does not expect a rate rise imminently, despite Yellen’s comments.Jackson Hole has done nothing to trigger a rate hike in the US,” he said. “While Janet Yellen has said the case for an increase in the federal funds rate has “strengthened”, demand-led data spurring inflation – which has been one of the causes of the delay to further hikes – continues to be soft and tepid, and therefore there is little reason for the Fed to act in September.”


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