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

Inflation looks likely to take off this year – but there’s one key risk
Inflation

Inflation looks likely to take off this year – but there’s one key risk

With the world’s governments spending money hand over fist, inflation looks certain to take off at some point. But China could change all that. John S…
19 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Will America’s “healthy reflation” end in inflation?
US stockmarkets

Will America’s “healthy reflation” end in inflation?

Democratic control of the US Congress would give Joe Biden huge scope to stimulate the economy. But willie mean a “healthy reflation” for the economy …
8 Jan 2021
23 December 1913: The US Federal Reserve is created
This day in history

23 December 1913: The US Federal Reserve is created

After much debate, Woodrow Wilson finally signed the bill that would create the US Federal Reserve on this day in 1913.
23 Dec 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021