Gold: Yellen Testimony: It Might Be Appropriate To Raise Rates In 2015, But Fed Remains Data Dependent
Federal Reserve Chair Janet Yellen reiterates in her testimony before the House Committee on Financial Services that an interest rate hike will be appropriate this year if economic conditions continue to improve.
After digesting Yellen’s comments, Comex August gold prices appear to be selling off in a delayed reaction. August gold hit a session low of $1,147.50 an ounce and are currently only slightly higher, trading at $1,148.50 an ounce, as of 9:08 a.m. EST.
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy. Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end,” she said in her prepared statements, which were released at 8:30 ahead of her 10 a.m. appearance.
However, Yellen continues to walk a fine line saying that the decision to raise interest rates will be based on the incoming data.
“But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise rates at any particular time,” she added.
In her prepared remarks Yellen remained optimist that the U.S. economy remains on the road to recovery, noting improvement in the labor market.
“Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly. Low oil prices and ongoing employment gains should continue to bolster consumer spending, financial conditions generally remain supportive of growth, and the highly accommodative monetary policies abroad should work to strengthen global growth,” she said. “In addition, some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effect of lower oil prices on capital spending, should diminish over time. As a result, the FOMC expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually.
Yellen also addressed foreign development risk to the U.S. economy, highlighting Greece and China as threats. However, she also downplayed the risks. “But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity. The U.S. economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively.”
Yellen also managed to down play weak inflation concerns; although she admitted that inflation remains well below the central bank’s target of 2%, this weakness is expected to be transitory.
“My colleagues and I continue to expect that as the effects of these transitory factors dissipate and as the labor market improves further, inflation will move gradually back toward our 2 percent objective over the medium term,” she said.
Avery Shenfeld, senior economist at CIBC World markets, said that Yellen’s opening remarks did hold any surprises as he noted three key themes in her statement: “: the economy is getting better, it’s still on track for a rate hike later this year, and when the Fed hikes, it needn’t be the start of something big. On growth, the only mild surprise is that she chose to emphasize the overall Q2 pick-up in consumption, with no mention of the disappointment in June retail activity.”
Paul Ashworth, chief U.S. economist at Capital Economics, agreed that Yellen’s testimony provided new insight especially after Friday’s speech in Cleveland.
“Regardless of her current assessment of economic conditions, what will determine the timing of the first rate hike and the pace of tightening after that is economic conditions, particularly the pace of wage growth and core inflation. We still believe that a pick-up in both will prompt the Fed into a much more aggressive series of rate hikes next year, with the fed funds rate finishing 2016 at close to 3.0%,” he said.
By Neils Christensen |
