US rate increase ‘likely’ later this year – Yellen

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WASHINGTON, D.C.: US Federal Reserve chief Janet Yellen said on Thursday (Friday in Manila) she still expects to increase interest rates in 2015 and that concerns about weaker global growth likely will not affect that plan.

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Yellen said improvements in the US economy “will likely entail an initial increase in the federal funds rate later this year.”

Policymakers will continue to monitor weaker activity overseas, she said, but the impact will probably not be “large enough to have a significant effect on the path for policy,” she said in a speech at the University of Massachusetts, Amherst.

Yellen’s remarks came a week after the US central bank opted at a widely anticipated meeting against enacting the first rate hike in nearly 10 years.

Following the September 17 meeting, Yellen told a news conference that the committee decided to hold off due to worries about slowing growth in China and capital flight from emerging markets.

But in Thursday’s speech, Yellen said policymakers were still “monitoring developments abroad” but did not think they would derail the US economy.

“Prospects for the US economy generally appear solid,” said Yellen, citing monthly job gains averaging round 210,000 and other data showing the economy has been expanding.

“My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.”

She said US unemployment, at 5.1 percent, is only “slightly above” what most policy makers see as normal. By contrast, inflation over the last year has been “essentially zero,” well below the targeted 2 percent level, Yellen said.

“Nevertheless, the Committee expects that inflation will gradually return to 2 percent over the years two or three years,” she said.

Yellen’s remarks lifted the dollar against other major currencies as it put back in play the possibility of a rate hike in October or December, the two remaining opportunities for Fed policy makers to act in 2015.

The euro fell to $1.1172 near 10 p.m. local time, compared with $1.1230 shortly before the remarks about an hour earlier. The US currency also advanced on the Japanese yen, the Swiss franc and British pound.

Yellen’s remarks were “significant in that it does indicate they’re going to move forward and raise rates this year,” said Kathy Lien, managing director at BK Asset Management.
“She made a pretty strong argument that rates are going to rise this year.”

But Jim O’Sullivan, chief US economist at High Frequency Economics, said Yellen also opened the door to pushing back the timetable.

“The forecast that tightening will start before the end of this year and then continue at a gradual pace in 2016 was once again cited,” O’Sullivan said.

“However, that is still just a forecast and there are risks and uncertainties, particularly relating to ‘global economic and financial developments.’”

AFP

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