Yellen confident on U.S. economy over the short term

Jan 13, 9:41 am
Yellen_Dollar rallies

The U.S. Federal Reserve Chair, Janet Yellen gave her first speech of the year on Thursday, speaking at a Town Hall meeting in Washington D.C. Addressing a group of economic teachers at the event, Ms. Yellen gave a vote of confidence on the U.S. economy noting that she has no major worries about the economy in the short term. Ms. Yellen remained optimistic on the U.S. labor market calling it “strong” and highlighted that wage growth is “starting to pick up.”

On inflation, Ms. Yellen said that although inflation was lagging behind the 2% target rate of the Fed, it was “pretty close” citing the near term risks to the Fed’s economic policy as being “pretty balanced.”

But not everything was upbeat as the Fed Chair said that sluggish productivity and income inequality remained major concerns for the long run.

The Fed Chair’s speech comes at a time when expectations are high that the central bank will be hiking interest rates this year. So far, Fed officials have remained tight-lipped on when the next rate hike will come.

The preliminary GDP report for the fourth quarter will be released late January which could potentially weigh on the Fed’s next policy move. The next FOMC meeting is scheduled for February 1st 2017, but comes without a press conference, indicating that the Fed will likely keep rates unchanged until it meets next in March.

The Federal Reserve for its part is also likely to present a more united front, reflecting a return to normalization in interest rates and a stable economy after years of doubts on the various unconventional tools being used by the central bank to support the economy during the recession years.

In the past week, nearly five Fed officials have spoken all of which have signaled on average of two and four quarter-point rate hikes this year. The Fed is of the view to hike interest rates thrice this year at the same quarter point basis.

On Thursday, Philly Fed President, Patrick Harker was quoted as saying, “I see three modest hikes as appropriate for the coming year, assuming the economy stays on track.”

Charles Evans, President of the Chicago Federal Reserve called three rates hikes as being “entirely plausible” provided the economy was strong enough while Dennis Lockhart, President of the Atlanta Federal Reserve maintained his view of “about two hikes.” Dallas Fed President, Robert Kaplan also said on Thursday that three rate hikes was justified if the economy continued to progress. Other regional Fed Presidents supporting the rate hikes included St. Louis Fed President; James Bullard who expects to see just one rate hike while Loretta Mester from the Cleveland Fed called three rates hikes to be “very reasonable.”

So far, Fed officials have remained upbeat on the U.S. economy overall with some already talking about winding down the Fed’s $4.5 trillion balance sheet as the U.S. economy is expected to return to normalized interest rates soon. Fed officials also saw little risks of a recession currently.

However, the markets remain wary on the level of confidence. Fed officials were hopeful on the U.S. economy last year, projecting four rate hikes only to end up hiking interest rates just once and this shift could come once again depending on factors such as the fiscal spending plans from the new Trump administration and fuel prices, weighing on inflation.

The Federal Reserve said that Ms. Yellen will be giving two more speeches next week. On Wednesday, January 18th Ms. Yellen will be addressing the Commonwealth Club of San Francisco at 3 p.m. ET and on Thursday, January 19th the Fed Chair will be speaking at the Stanford Institute for Economic Policy Research.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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