Yellen hints at a US interest rate rise

The dollar and Treasury yields dipped following Janet Yellen's upbeat assessment of the US economy.

15-2-26-yellen-634

Janet Yellen: not a devine being

Global stocks hit new highs early this week. The FTSE All World index, America's S&P 500 and Britain's FTSE 100 all hit all-time records, while European stocks reached a new seven-year peak. Relief over the deal with Greece, firmer Chinese data and remarks by US Federal Reserve chairwoman Janet Yellen all contributed to the bullish mood.

Yellen gave an upbeat assessment of the American economy, but also pointed out how low consumer price inflation was. The dollar and Treasury yields dipped (reflecting rising prices) after her remarks.

What the commentators said

The hawks would point to her upbeat tone on the labour market, and to her signal that the Fed will drop the word "patient" from its post-meeting policy statement when it reckons higher rates could be warranted at any time.

Previously, the Fed said "patient" meant it would wait for at least two meetings to move. On the other hand, doves highlight the absence of strong wage growth and low inflation.

The upshot, reckoned Hamish McRae in The Independent, is an increase in the cost of money in June. "Well, maybe a bit later, but almost certainly by the autumn." Still, as so often, the Fed highlighted that it was dependent on the data in order to reduce the scope for a rise in rates to shock markets. "But when it comes to dependency on economic data, much depends on interpretation," said the FT's James Mackintosh.

A key uncertainty is whether wage growth will take off once "full employment" (meaning an unemployment rate of around 5.5%) is reached, as it has in the past. Another question is whether the unusually high numbers of part-time and discouraged workers will rejoin the labour market as the economy strengths, reducing the pressure for wage increases.

Will the Fed get it right? Investors who always wait with bated breath for central banks' latest Delphic remarks should remember that "central bankers are not divine beings with supernatural powers", said Satyajit Das on business-standard.com. The Swiss central bank's sudden U-turn on tying the franc to the euro is just the latest reminder of their fallibility. Don't count on a trouble-free exit from the zero-interest-rate twilight zone.

Recommended

Here’s why markets welcomed America’s big interest rate rise
Stockmarkets

Here’s why markets welcomed America’s big interest rate rise

The US Federal Reserve raised interest rates by half a percentage point – the biggest hike in 20 years. So why did markets rise? John Stepek explains …
5 May 2022
UBI which was once unthinkable is being rolled out around the world. What's going on?
Global Economy

UBI which was once unthinkable is being rolled out around the world. What's going on?

Universal basic income, the idea that everyone should be paid a liveable income by the state, no strings attached, was once for the birds. Now it seem…
8 Apr 2022
The stockmarket rebound has nothing to do with Ukraine or the Federal Reserve
Stockmarkets

The stockmarket rebound has nothing to do with Ukraine or the Federal Reserve

Stockmarkets bounced yesterday after the Fed raised interest rates and hopes of peace in Ukraine rose. But more relevant was what happened in China. J…
17 Mar 2022
The US Federal Reserve must fight its own battles
US Economy

The US Federal Reserve must fight its own battles

Getting involved in other political fights will undermine the credibility of America's central bank – and that could affect us all, says Matthew Lynn.
6 Mar 2022

Most Popular

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?
Investment trusts

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?

After a spectacular couple of decades, the Scottish Mortgage Investment Trust has fallen by almost 45% so far this year. Rupert Hargreaves asks if no…
26 May 2022
The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
Is it time to pick up growth stock bargains yet?
Investment strategy

Is it time to pick up growth stock bargains yet?

If you’re thinking of picking up some bargains from the tech stock crash, beware – there are still plenty of “growth traps” out there. John Stepek exp…
26 May 2022