Janet Yellen says case for Fed interest rate hike has strengthened

The case for raising U.S. interest rates has strengthened in recent months because of improvements in the labor market and expectations for moderate economic growth, Federal Reserve Chair Janet Yellen said in her speech on Friday, ForexSQ forex news team provide full information about the Janet Yellen Speech on Friday Augut 2016 and its impact on Forex, commodities and stock markets.

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Yellen did not indicate when the U.S. central bank might raise rates, but her comments reinforced the view that such a move could come later this year. The Fed has policy meetings scheduled in September, November and December.

Speaking at a three-day international gathering of central bankers in Jackson Hole, Wyoming, Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in prepared remarks.

She added that the Fed still thinks future rate increases should be “gradual.”

The Fed raised rates in December, its first hike in nearly a decade, but it has held off further increases so far this year due to a global growth slowdown, financial market volatility and generally tepid U.S. inflation data.

Investors currently see an 18 percent probability the Fed will raise rates at its September policy meeting and a 53 percent chance of an increase in December.

Yellen’s comments, by failing to lay out a clear roadmap for what the Fed needs to see to raise rates, will likely not convince some investors that a rate increase is imminent, in part because Fed policymakers are seen as sharply divided over whether to increase rates soon or take a more cautious approach.

Yellen was speaking on Friday at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut rates to near zero and flooded banks with money.

She devoted much of her speech to outlining how the Fed may deal with future recessions now that many economists and Fed officials believe that an aging population and other dynamics appear to be slowing U.S. economic growth over the long term.

Because slower growth means future U.S. interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates.

Such a view is “exaggerated,” Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions. It may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.

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Stocks, Bond Yields Rise After Yellen’s Remarks

U.S. stocks and government bond yields rose Friday, as Federal Reserve Chairwoman Janet Yellen said in prepared remarks that the case for an increase in short-term interest rates has strengthened in recent months.

The remarks, which were part of a speech at the annual economic symposium in Jackson Hole, Wyo., left the possibility for a rate raise as early as September on the table.

The Dow Jones Industrial Average rose 74 points, or 0.4%, to 18523, compared with being up 49 points, or 0.3%, ahead of the prepared remarks. The S&P 500 and the Nasdaq Composite recently added 0.4%.

The yield on the 10-year Treasury note was 1.583%, compared with 1.561% ahead of the remarks and 1.576% Thursday.

The WSJ Dollar Index rose less than 0.1%. It is down nearly 5% this year as investors have scaled back expectations of Fed rate increases. Lower interest rates tend to make a currency less attractive for investors seeking yield-bearing assets.

Gold rose 0.2% to $1,327.60 an ounce.

Stock markets have traded in a narrow range this week with a light calendar of economic and business data releases. Loose U.S. monetary policy has been the main driving force in financial markets in recent times, keeping the dollar weak and supporting stocks and bonds. Investors were waiting to parse Ms. Yellen’s speech for any clues on the path of interest rates or her thoughts on the health of the U.S. economy.

Jeroen Blokland, a senior fund manager at asset manager Fxstay , said ahead of the prepared remarks that markets have become “complacent about any rate hike,” and said there is room for the dollar to start to rise again, which would likely bring an end to the rally in the S&P 500.

“We do think the Fed is important, especially from the surprise angle that markets aren’t used to central banks hinting at rate hikes any more,” Mr. Blokland said.

Data from EPFR Global show that investors have been pouring money into funds tied to expectations of ultralow rates in recent months, such as investment-grade and high-yield credit, real estate and dividend-equity funds, after several months of outflows in late 2015 and early 2016.

Ahead of the prepared remarks, trading in fed-fund futures suggested investors were assigning a roughly a 50% probability to the Fed raising interest rates by December, and a 24% chance of a September move, according to data from Fxstay Group.

The Stoxx Europe 600 gained 0.4%.

Earlier Friday, the U.S. Commerce Department reported that gross domestic product expanded at an inflation-adjusted 1.1% seasonally adjusted annual rate in the second quarter. That was down slightly from last month’s initial estimate of a 1.2% growth pace.

U.S. crude oil edged up 0.3% to $47.48 a barrel.

Shares in Asia were mixed. Japan’s Nikkei Stock Average fell 1.2%, weighed down by a stronger yen after data showed a fifth straight monthly decline in Japanese consumer prices. The dollar fell 0.3% against the yen to ¥100.310 recently, hurting Japanese exporters.

The Shanghai Composite Index rose less than 0.1%, while Australia’s S&P ASX 200 closed down 0.5%.

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