US Fed Chair says case for another rate hike has strengthened

The Fed Chair was optimistic regarding the economy, concluding that interest rate hikes are very likely.

But she’s stopping short of signaling any timetable for the next rate hike. Then investors began to have second thoughts, wondering if an increase was possible as early as next month, and buyers turned to sellers.

Her speech came a day after hawkish comments from Fed Vice-Chair Stanley Fischer, who said “the issue of overheating of the economy is being discussed within the Fed board”.

After Fischer spoke, the 2-year note yield rose to 0.80 percent, a level it had retreated from in the aftermath of Yellen’s speech. The KBW Nasdaq bank index .BKX rose 0.74 percent.

The case for raising US interest rates has strengthened in recent months because of improvements in the USA labor market and expectations for moderate economic growth, Yellen said. Markets increasingly expect a hike in December after a run of mostly better-than-expected data, including the strong July jobs report, a jump in new-home sales and a surge in durable goods orders.

Yellen added that the balance sheet was likely to be useful for policy for some time.

Euro zone government bond yields, including Germany’s 10-year bond, fell.

Spot gold rose 1.3 percent as the US dollar lost ground despite Yellen’s comments.

Yellen was speaking at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut ratesto near zero and flooded banks with money.

Futures indicated about a 24 percent chance the central bank will raise rates when it meets in September and a 53 percent probability of a hike by December, according to data compiled by Bloomberg.

“Anything that’s not going to be straight-out dovish is going to be disappointing”, she said.

In the run-up to the rate hike that December, Yellen had similarly looked for support from coming jobs numbers.

The economy grew an annual pace of 1.1% in the quarter, slightly slower than the first estimate of 1.2%.

The Commerce Department released a report before the start of trading showing a slight downward revision to the pace of USA economic growth in the second quarter. But she said those options would require more study.

Design software company Autodesk jumped $5.17, or 8 percent, to $68.87 after reporting a small profit, beating expectations of a loss. Freeport McMoRan, a copper miner, rose almost 3 percent. That would be the fourth quarter in a row of drops.

Mirroring the market’s swings, the CBOE Volatility index, known as Wall Street’s “fear gauge”, touched a seven-week high of 14.67.

European stocks advanced marginally with London and Frankfurt rising 0.3 percent and Paris gaining 0.8 percent by the close.