Fed’s Janet Yellen boosts rate hike chances

August 30, 2016


The probability of the Federal Reserve (Fed) to increase interest rates twice during this year have increased according to its Chairwoman Janet Yellen. During her annual speech, which once again took place at Jackson Hole, she supported the Fed’s initial plan for gradual increases while she also said that there is “strengthened” probability for another rate hike.

Fed’s Chairwoman supported her comments by saying that there has been continuous strong performances coming from the unemployment sector, while the Fed’s inflation outlook has also increased, and that is why the probability of a rate hike has strengthened. However, she also pointed that the Bank’s future decisions will be subject to the level to which upcoming economic data reports will be supportive.

Friday’s speech given by Ms Yellen has raised the probability of an interest rate increase during next month, as long as the upcoming Nonfarm Payrolls (NFP) report shows further strengthening of the labour market. The NFP data are expected for release this Friday 02 September at 12:30 GMT. During the previous five meetings of the Federal Open Market Committee (FOMC), its members have decided on keeping interest rates unchanged. The FOMC’s latest meeting minutes revealed concerns over global economic uncertainty following the UK’s decision in late June to exit the European Union.

Low interest rates can obstruct future efforts to fight recession, according to Ms Yellen. By keeping interest rates low, both the business sector and consumer are motivated to spend money rather than keeping it in a bank and hence to inject the economy with cash. But considering that interest rates are at very low levels, there is not much room for additional trims as there was in the past. Nevertheless, she sounded reassuring by saying that although interest rates are very low, the Fed will be in a position to take action under most scenarios.

Following the continuous improvement of the unemployment levels, data published on Friday revealed that consumer spending has been revised upwards from 4.2% to 4.4%, whereas unemployment benefits for the week ended 20 August were reduced by 1,000. On the other hand, the Q2 GDP was revised downwards by 0.1%.

The EUR/USD on Friday decreased by 0.8% on revised estimations of an upcoming Fed interest rate increase during FOMC’s September meeting. On a weekly basis, the world’s most popular currency pair fell by 0.9%.

Prior to the speech given by the Fed Chairwoman, the markets were not very hopeful for an interest rate increase during next month and many investors have even settled for interest rates to remain at the same level until the end of the year. The last time the Fed decided to increase interest rates was just before the end of 2015, by 0.25%. So there is a possibility that the Fed might be aiming to push the markets to begin pricing in an interest rate increase during this year. Let’s see what Friday’s upcoming NFP data will say?


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