Janet Yellen says case for interest rate hike is getting stronger

Treasuries gained after Federal Reserve Chair Janet Yellen signaled a gradual pace of interest-rate increases, while indicating that the case for tightening has strengthened.

Federal Reserve chairwoman Janet Yellen has opened the door a little wider to a rate hike, after voicing optimism about the USA economy at her eagerly awaited speech at the Jackson Hole summit of central bankers, says an analyst.

USA stock markets, which opened slightly higher, added to gains, with the S&P 500 trading up 0.4 percent shortly after the text of her speech was released. Finally, we note that the chair made no mention of the risks outlined in her June speech, including concerns over the resilience of domestic demand, sustainability of Chinese growth, nor the aftermath of the United Kingdom vote on European Union membership. Although setting a hawkish tone and perhaps trying to sound balanced, Yellen did issue a few cautionary words, but for the most part, she indicated that more rate hikes were on the horizon.

Federal Reserve Vice Chairman Stanley Fischer told reporters on Friday the decision on whether to hike interest rates should be looking forward, not backward – and the next jobs report will figure into the process. “We think the evidence is that the economy has strengthened”.

Meanwhile, the dollar edged down and global shares slipped to a two-week low as investors turned cautious before a keynote speech by Yellen that could map out a clearer path for U.S. interest rates.

That could be taken as a hint that U.S. interest rates could rise when the Fed next meets in September. Judging by the CME Group’s FedWatch tool, markets assigned a probability of just 18% to a September hike going into the speech. Belisle said the majority of investors expecting a raise in the rate before the end of the year.

But to combat future downturns, she said the Fed should explore other options, too.

There were positive elements in the report, though, such as the upward revisions in consumer spending and an improvement in business investment figures from the preliminary estimate.

Such a view is “exaggerated”, Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions. She said efforts need to be made, in particular, to boost the productivity of USA workers. Growth hasn’t topped 3% for a full year since 2005.

In advance of Yellen’s speech Friday, George, Fischer and eight other Fed officials met Thursday with about 120 activists from the Campaign for Popular Democracy’s Fed Up coalition.