Federal Reserve chair Janet Yellen offered the market a hawkish message on Tuesday as she indicated the US economy might be poised for a series of gradual interest rate increases, starting as early as next month.
With her bi-annual monetary policy report to Congress on 14 February, which was repeated the following day in a Testimony to the House of Representatives, Yellen said the Federal Open Market Committee (FOMC) expected that the “evolution of the economy” would warrant further gradual increases of the federal funds rate “to achieve and maintain its employment and inflation objectives”.
She noted the “considerable uncertainty” surrounding the economic outlook, pointing to possible incoming changes to US fiscal policy, sources and trajectory of future productivity and international developments.
She warned a possible risk to waiting “too long” to tighten policy might lead to a more dramatic rate increase, “which could risk disrupting financial markets and pushing the economy into recession.”
Her tone wasn’t a huge surprise, building on her comments only last month.
For an economy operating at full employment, current interest rates are currently are completely “out of whack”, according to Gary Potter, co-head of the multi-manager team at BMO Global Asset Management.
He said: “I think it seems perfectly logical and realistic to expect the Fed – which is still independent - to move as they see fit because all the data suggests there is no reason why they shouldn’t.”
What Yellen managed to dispel this week, was any suggestion she might simply ‘wait and see’ what Donald Trump has planned for his fiscal spending plans.
Potter added with near-full employment, optimistic levels of small business and consumer confidence, as well as inflation moving upwards, the circumstances are such that one would expect central banks to start to nudge rates higher.