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Yellen hints that September interest rate hike not off the books

Case for increase strengthened in recent months

Janet Yellen, Federal Reserve System chair of the board of governors hinted in her speech today that a rate hike in the near term is not off the books, and some speculate that it could come as soon as September.

Yellen brought up the recent minutes for June’s meeting that showed many were divided on the issue of raising rates.  

“As noted in the minutes of last month's Federal Open Market Committee meeting, we are studying many issues related to policy implementation, research which ultimately will inform the FOMC's views on how to most effectively conduct monetary policy in the years ahead,” Yellen said.

That being said, she also noted the improvements seen in the economy in recent months, and how it will affect decisions going forward.  

“U.S. economic activity continues to expand, led by solid growth in household spending,” Yellen said. “Looking ahead, the FOMC expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years.”

The Gross Domestic Product, that is, the value of everything a nation produces, increased by an annual rate of only 1.1% in the second quarter, according to the “second” estimate released by the Bureau of Economic Analysis.

Total non-farm payroll employment increased by 255,000 in July, far above what experts predicted.

“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,” Yellen said. “Indeed, 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.”

Yellen pointed out that, while the Fed has seen reason to increase rates, whether or not they raise rates is subject to the continuation of these market conditions.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook,” Yellen said.

She also pointed out that not all market conditions are ideal, and some things continue to work against the notion of raising rates.

“But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports,” Yellen said. “And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course.”

“Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy,” she said.

Some experts, however, say that while a September rate hike could be possible, a December hike is more likely.

“The odds still favor a rate hike in Q4, but September is quickly nearing a coin-flip proposition,” said Curt Long, National Association of Federal Credit Unions chief economist.

Other experts agreed.

“In her speech at the Jackson Hole symposium today, US Fed Chair Janet Yellen’s acknowledgement that ‘the case for an increase in the federal funds rate has strengthened’ would appear to increase the likelihood of a near-term rate hike,” Capital Economics Economist Andrew Hunter said.

“On balance, however, we think most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2% target, with a December move still appearing the most likely outcome,” Hunter said.

This is a very different prediction than Capital Economics’ prediction just a couple months earlier.

Back in June, Capital Economics claimed that the Fed will raise rates faster than the markets expected. In fact, they said that by the end of next year, rates could increase at least 1.75% to 2%.

The markets began adjusting before Yellen’s speech, and now believe a rate hike could be around the corner.

“The markets are now assigning a 33% chance of a rate hike in September,” said Brent Nyitray, iServe Residential Lending director of capital markets.

“Somewhat hawkish Fed-speak out of different Fed heads largely accounts for the increase,” Nyitray said. “The Fed Funds futures markets are also assigning a 58% chance of a hike through December.”

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