Yellen Says She Still Expects Rate Increase This Year
Comment of the Day

September 24 2015

Commentary by David Fuller

Yellen Says She Still Expects Rate Increase This Year

Here is the opening from this report on the Fed chief’s speech at Amherst this evening following Wall Street’s close:

Federal Reserve Chair Janet Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic “surprises” could lead them to change that plan.

“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen said during a speech Thursday in Amherst, Massachusetts. “But if the economy surprises us, our judgments about appropriate monetary policy will change.”

Yellen, 69, spoke a week after the Federal Open Market Committeeleft its benchmark federal funds target near zero, saying "recent global economic and financial developments" might damp growth and inflation in the U.S. Concerns over a slowdown in China following a surprise Aug. 11 devaluation of the yuan triggered turmoil in financial markets and raised questions about the outlook for the global economy.

While “there wasn’t anything significant enough that changed in one week for her to give us a different take,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, Yellen “finally acknowledges that she, specifically, does believe that a rate hike is appropriate this year.”

David Fuller's view

Of course the Fed would like to commence normalisation of monetary policy as the US economy shows further signs of recovery.  However, it is not working to any arbitrary deadline, nor should it.  Further market chaos beyond October would most likely stay the Fed’s hand once again, and here is why.

A Bloomberg commentator mentioned today that every central bank which has raised rates in the last few years has subsequently had to reverse that decision.  The Fed does not wish to join that club for obvious reasons. 

Interestingly, legendary business man Jack Welch, former General Electric CEO, was asked on CNBC this morning if the Fed should have raised rates last week, as some commentators have stated.  He replied: “No, there isn’t any inflation.”

(See also: Yellen’s Speech on Inflation, Fed Policy)

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