Yellen: Rate hike likely appropriate this year

“Asset classes like gold are still expensive and they are fundamentally likely to suffer if <strong>USstrong> rates go up, if <strong>the dollarstrong> remain strong“, Manpreet Gill, head of fixed income, currency and commodities investment strategy at Standard Chartered Plc, said in an interview on Bloomberg Television. This week, Norway, Taiwan and Ukraine lowered interest rates.

While the broader market pared losses somewhat in the afternoon, investors were cautious ahead of a speech by Federal Reserve Chair Janet Yellen, which could provide clues regarding the timing of an increase in USA interest rates.

In a speech at the University of Massachusetts, Amherst, Yellen said she expects inflation will return to 2% over the next few years as temporary factors now holding it down will wane. USA stocks will likely be the best performers, even those aren’t doing that well.

Yellen said sharply lower oil prices and the rising value of the dollar have kept inflation down recently.

More troublingly, the Fed has lost credibility in the eyes of many investors who would have preferred the certainty of a rate hike – albeit a dovish one which emphasised the gradual and cautious nature of subsequent tightening – to the uncertainty of a delay in the policy normalisation process.

“There is just not a lot she can say about monetary policy and what the Fed can do, it is such an uncertain environment”, Michael Moran, chief economist at Daiwa Capital Markets America, told Marketwatch.

Acknowledging the argument, Yellen said that would risk harming the economy because there is a lag in the effects of monetary policy changes.

The gloomy figure added to concerns over the health of the world’s second largest economy.

The USA equity market has been skittish since last Thursday when the Fed held off from raising rates, as was expected by some.

Yellen’s speech comes on the heels of the central bank’s decision last week to keep short-term interest rates unchanged. Odds of a hike at the Fed’s next meeting in October are at 18 per cent, according to Fed funds futures, while the probability of an increase at the December gathering is about 43 per cent.

The chances of a US federal government shutdown due to a funding lapse is probably around 50-50, Goldman Sachs’ Alec Phillips estimated in a Monday note to clients.

Obama administration officials hope there will not be a shutdown but as a precaution they are reviewing contingency plans, Labor Department spokesman Stephen Barr said Thursday.