Yellen says case for Fed rate hike has strengthened

© Reuters. Yellen says the case for rate hike strengthened and inflation to hit target in a few years

Investing.com – Federal Reserve (Fed) chair Janet Yellen indicated on Friday that the positive data in recent months has strengthened the case for the U.S. central bank to return to the normalization of monetary policy.

“I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said in a speech delivered at the Jackson Hole Economic Symposium.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook,” she added.

Yellen further explained that the Federal Open Market Committee (FOMC) that decides on monetary policy "continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives."

Yellen pointed to expectations for moderate growth and recent strength in the U.S. labor market as laying the foundation for the improved outlook.

She added that the Fed expected inflation to rise to the 2% target “over the next few years”.

“Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy,” she admitted.

In her conclusion, Yellen expressed her belief that the monetary policy will “continue to play a vital part in promoting a stable and healthy economy.”

She further noted that the Fed’s monetary policy still has ammunition, despite the current historically low levels of interest rates.

“Even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively,” she concluded.

In an immediate reaction, U.S. equities extended gains. At 14:08GMT or 10:08AM ET, the Dow Jones gained 68 points, or 0.38%, while the S&P 500 advanced 8 points, or 0.35%, and the tech-heavy Nasdaq Composite traded up 20 points, or 0.39%.

After an initial pop higher, the dollar weakened against major rivals. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, slipped 0.26% to 94.43, compared to 94.52 ahead of the speech.

Gold for December delivery on the Comex division of the New York Mercantile Exchange extended gains, trading up 0.95% at $1,337.15, compared to $1,329.90 previously.

Markets cut odds of a rate hike after Yellen’s speech. Fed fund futures priced in the possibility of a rate hike for the September meeting at 12%, compared to 21% prior to the remarks, according to Investing.com’s Fed Rate Monitor Tool.

Odds for November dropped to 21.1%, compared to 37.5% earlier.

However, markets still counted on a move in December though the chance had dropped from 55.2% to 51.2%.

Stay up-to-date on market expectations for future Fed policy moves by visiting:
http://www.investing.com/central-banks/fed-rate-monitor