Fed may raise rates as soon as next spring, Yellen suggests

Friday, 21 March 2014 04:08 - - {{hitsCtrl.values.hits}}

REUTERS: The US Federal Reserve will probably end its massive bond-buying program this fall, and could start raising interest rates around six months later, Fed Chair Janet Yellen said on Wednesday, in a comment which sent stocks and bonds tumbling. Yellen’s remarks at her first news conference as the head of the central bank pointed to a more aggressive path toward higher interest rates than many had anticipated, and bets in financial markets shifted accordingly. The comments came after a two-day meeting in which Fed officials made another reduction in their bond-buying stimulus and decided to

jettison a set of guideposts they were using to help the public anticipate when they would finally raise rates. The Fed said the change in its rate hike guidance did not mark a shift in its intentions and that it would wait a “considerable time” after shuttering its asset purchase program before pushing borrowing costs higher. Yellen, who had fielded numerous questions without a hitch, hesitated when asked what the Fed meant by “considerable.” “I -- I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends -- what the statement is saying is it depends what conditions are like.” Several analysts wondered whether her answer was an unintended slip, given the deliberately vague language of the Fed’s statement. Either way, the reaction in financial markets was swift and sharp. Prices for US stocks and government bonds added to earlier losses triggered by fresh Fed forecasts that showed policymakers are inclined to raise rates a bit more aggressively than they had been just a few months ago. The US dollar rose. “The forecast change could be interpreted as a relatively hawkish shift ... and as such the general market reaction seems well-founded,” said JP Morgan Economist Michael Feroli.

Dollar hits three-week high, world stocks fall as U.S. rate rise comes into focus

Reuters: The dollar hit three-week highs against a basket of currencies and stocks and bonds fell across the globe on Thursday as investors positioned for a speedier rise in US interest rates than previously thought. Global stocks as measured by the MSCI world equity index dropped 0.9% after Federal Reserve Chair Janet Yellen said on Wednesday the US central bank might end its bond-buying programme this autumn, and could start to raise interest rates around six months later. Combined with a slight rise in the projected path for rates by Fed members, that led the market to bring forward the likely timing of the first hike in US rates by a couple of months. European stocks dropped 0.8% on Thursday, following losses of more than 1.5% in Japan and Asian markets. U.S. stock index futures pointed to a lower start on Wall Street, after declines there on Wednesday.

Futures traders moved to price in a first interest rate hike as soon as April 2015. Previously, it was July. Most top Wall Street economists, however, continued to see the first rate hike in the second half of 2016, according to a Reuters poll. Yellen sought to use her news conference to emphasise that rates would stay low for awhile and rise only gradually. She also said they could end up staying lower than normal “for some time” even after the jobless rate drops to a healthy level. The Fed would look not only at how close inflation and unemployment are to its goals, but how fast, or slowly, those measures are approaching those goals, she said. At 6.7%, the unemployment is well above the 5.2% to 5.6% range Fed officials see as in keeping with full employment. The central bank’s favoured inflation gauge is barely more than half of its 2.0% target. The Fed has held interest rates near zero since late 2008 and has pumped more than $ 3 trillion into the economy with its bond purchases to try to foster a stronger recovery. Of the Fed’s 16 policymakers, only one believes it will be appropriate to raise rates this year; 13 expect a first rate hike next year, and two others see the first rate hike coming in 2016, according to the new forecasts. But once rate hikes start, Fed officials see slightly sharper increases than they did in December, when they last issued forecasts. They now see rates ending 2016 at 2.25%, a half percentage point above their December projections. The central bank proceeded with its well-telegraphed reductions to its massive bond-buying stimulus, announcing it would cut its monthly purchases of US Treasuries and mortgage-backed securities to $ 55 billion from $ 65 billion. The decision to further scale back its stimulus keeps the Fed on track for the measured wind down laid out by Yellen’s predecessor, Ben Bernanke. The Fed repeated that it plans to continue trimming the purchases in “measured steps” as long as labour conditions continue to improve and inflation shows signs of rising back toward the Fed’s 2.0% goal.