Tuesday 20 February 2018

US Federal Reserve signals on interest rate rises

Federal Reserve Chair Janet Yellen testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on
Federal Reserve Chair Janet Yellen testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on "Semiannual Monetary Policy Report to Congress" on Capitol Hill in Washington. Reuters

Christopher Condon and Jeff Kearns

US Federal Reserve Chair Janet Yellen sought to prepare investors for a change in the Fed's pledge to be "patient" on raising interest rates, saying it would provide flexibility to tighten when conditions are ripe.

A shift in guidance would signal the economy has improved to the point where an increase "could be warranted at any meeting", while not necessarily committing policy-makers to a rate increase on a specific timetable, Ms Yellen said in testimony yesterday before the Senate Banking Committee.

She struck an upbeat note in her assessment of the economy, saying the job market is improving and household finances are stronger. Stocks and US bonds initially fell, then rallied as investors focused on her comments that inflation and wage growth remain too low.

Yellen's remarks are in keeping with her efforts to move away from calendar-based guidance, instead conditioning investors to watch the data as they seek to judge when borrowing costs are likely to rise for the first time since 2006. Most Fed officials have predicted an increase some time this year.

"The Fed is pushing to get flexibility," said Diane Swonk, chief economist at Mesirow Financial Holdings in Chicago. "They want to move away from the concept that guidance is a pledge on policy." Yesterday, Ms Ms Yellen repeated that the Fed's pledge to be "patient" on beginning to raise the benchmark interest rate means an increase is unlikely for "at least the next couple" of meetings.

The central bank adopted the guidance in December and repeated it in January.

Michael Feroli, chief US economist at JPMorgan Chase, predicted the Fed will change the guidance at its next meeting, in March.

Irish Independent

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