Yellen: more rate hikes coming if economy stays strong
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Yellen: more rate hikes coming if economy stays strong

If the U.S. economy meets the Federal Reserve’s (FED’s) outlook of rising inflation and tightening labour markets, then chairwoman Janet Yellen thinks there’s a strong case for more rate hikes earlier than expected.

Painting a positive picture of the U.S economy, Yellen told the Senate Banking Committee on Tuesday that:

“Gains in the labor market have been accompanied by a further moderate expansion in economic activity. U.S. real gross domestic product is estimated to have risen 1.9% last year, the same as in 2015. Consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the value of households’ financial assets and homes, favorable levels of consumer sentiment, and low interest rates. Last year’s sales of automobiles and light trucks were the highest annual total on record.”

This background has created significant expectations for the U.S. economy in the upcoming year, and Yellen was quick to point out how the FED would evaluate the case for further rate hikes:

“At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

She also used her semiannual report to reiterate that, if President Trump proves good on his promise to revitalize American growth, inflation has to rise alongside it. Otherwise, any expansion of the economy could be cut painfully short. In such a situation, the FED would likely be forced to pick up the pace of rate hikes, effectively protecting the U.S. economy from itself. But this would not be a perfect solution. She told the Senate:

“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”

Yellen gave no indication as to the timing of the next rate hike, but (according to Bloomberg) investors think there’s a 34% chance of one at the next meeting over March 14 – 15. This is up 4% from before Yellen’s speech.

The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.

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