Yellen Signals Rate Hike Likely This Month

Thus, Chair Yellen’s speech today tells us that, not only is the Fed likely to raise rates in March, but it’s also serious about raising rates a couple of times or twice in 2017.

The head of the US central bank says improvements in employment and rising inflation mean an interest rate increase will “likely be appropriate” later this month.

Elsewhere in the speech, she indicated that the economy was meeting the Fed’s expectations.

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New York Fed President William Dudley, a permanent voter on the U.S. central bank’s open market committee, said the case for tightening monetary policy “has become a lot more compelling”.

“We’ve had this great run of data in the U.S. and the expectation on a March rate move has gone up”, said Steven Englander, global head of foreign exchange strategy at Citigroup in NY.

‘Two months into 2017 and despite a slowing in the rate of growth in February, manufacturers continue to register strong levels of output, healthy order books and growing trade courtesy of a weak sterling, ‘ noted Mike Rigby, head of manufacturing at Barclays.

Many investors had until recently been expecting the Fed to sit tight until May or June before the USA central bank lifted its target range for the federal funds rate to 0.75 per cent to 1 per cent.

A major reason for the recent signals from Fed officials for a rate increase is the robust job market.

“A rate increase is very much on the table for consideration at our March meeting”, John Williams, Dudley’s counterpart in San Francisco, also said at a lecture Tuesday.

The stock market, in the meantime, has been setting a string of record highs, fueled by confidence that Trump’s plans for cutting taxes and boosting spending will win congressional approval.

Sterling sank to a six-week low of $1.2881 on Wednesday as disappointing economic data added to political nerves that have begun to weigh on the currency again after last year’s Brexit vote. For most of 2015 and 2016, temporary declines in energy and import prices had dragged down aggregate inflation gauges.

Yellen noted that various stumbling blocks slowed the Fed’s anticipated pace of rate increases in 2015 and 2016, including the oil price crash, a strengthening dollar, market turbulence and a slump in US economic and job growth.

“On the whole, the prospects for further moderate economicgrowth look encouraging, particularly as risks emanating fromabroad appear to have receded somewhat”, Yellen said. In estimating three rate hikes for 2017, the Fed was indicating a quickened pace of increases.

In commodities, crude oil futures rose as the weaker USA dollar encouraged buying, but investors remained cautious after Russian production figures showed weak compliance with an agreement to cut output. The personal consumption expenditures price index, the Fed’s favored measure of inflation, rose 1.9 percent in the 12 months ending in January, almost reaching the Fed’s 2 percent inflation target.

“Those increases would keep the economy from significantly overheating”, Yellen said. Bianco Research notes that once a meeting is 10 trading days a way, the market has correctly predicted the Fed’s actions 90 of the last 90 times.

“The Federal Open Market Committee has made significant tactical adjustments along the way”, she said.