Fed’s Yellen: Further Rate Increases Likely To Be Appropriate

In her prepared statement to the Senate Banking Committee, Federal Reserve Chair Yellen stated that further adjustments in interest rates are likely to be needed, although policy is not on a pre-set course.

She went on to say that a rate increase will be likely be appropriate at one of the forthcoming meetings if the economy remains on track. At the upcoming meetings, the FOMC will evaluate whether employment and inflation are continuing to evolve in line with their expectations.

Waiting too long before raising rates would be unwise as it could require disruptive rate increases that push the economy into recession.

According to Yellen, the incoming data suggests that the labour market continues to strengthen and that inflation is moving towards 2%, in line with FOMC expectations. In this context, the FOMC expects the economy to expand at a moderate pace with the job market set to strengthen somewhat further.

The case for higher interest rates was also based on expectations that the natural Fed Funds rate will gradually increase over time.

She still expected US and global monetary policy to remain accommodative and that the economic outlook is uncertain.

US fiscal policy changes could affect the economic outlook, but it was too early to know how this will unfold. Yellen expressed hopes that fiscal policy changes will be consistent with putting US fiscal accounts on a sustainable trajectory. She declined to make any comment on specific tax and sending policies, but reiterated the importance of improving the longer-term pace of economic growth through stronger productivity growth.

There was no specific reference to individual meetings, but the comments suggested that March will be a live meeting.

The dollar edged higher into the prepared statement and Treasuries came under pressure. Dollar gains extended after her prepared comments with USD/JPY breaking above 114.20 while EUR/USD retreated to the 1.0580 area. US Treasuries weakened with 10-year futures declining around 16 ticks as the yield approached 2.50% while equities edged lower.

Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.