Fed’s Yellen keeps markets guessing
August 26, 2016, 2:42 pm

Yellen’s also predicted that markets would gradually soon move toward the Fed target of two per cent inflation, but still refrained from naming a date for the next rate hike [XInhua]

She said that the justification for a rate hike “has strengthened in recent months”.

In the first market reaction, US stocks rose immediately after her Friday speech indicating a September hike is unlikely. The Dow Jones Industrial average, for example, jumped 109 points at press time, a 0.60 per cent jump to 18,558.19.

US stocks, along with global markets, had held off from heavy volume trading on Thursday and Asia on Friday as they waited with baited breath for hints of a rate hike timetable.

While Yellen said that broader measures of labor utilization have improved and that there has been solid growth in household spending, business investment is “soft” and the strength of the dollar in the past year has kept US exports restrained.

She also expressed concern that productivity was also low.

Nevertheless, her assessment on Friday of the US economy is considered more optimistic than in recent months.

“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said.

She acknowledged that the “US economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability”.

Yellen’s comments largely echoed and elaborated on the minutes (released last week) of the July Federal Open Market Committee (FOMC) meeting.

But prospects for an interest rate hike have varied greatly throughout August depending on the number of economic reports released by the labor and commerce departments in the US.

Chances of a rate hike or greatly boosted in early August following the release of the jobs report which profoundly beat investor and analyst forecasts.

The Bureau of Labor Statistics said in its latest report Friday that the US economy added 255,000 jobs in July, beating forecasts and registering at the highest level so far in 2016.

The upbeat report comes after less than encouraging data last week which showed that US GDP growth had slowed significantly.

On July 29, the Department of Commerce said that the US economy had grown at a seasonally adjusted rate of just 1.2 per cent in the second quarter, far less than the 2.5 per cent predict by markets.

On Friday the Department of Commerce again revised that figure down to 1.1 per cent for the second quarter.

To make things worse, the Department of Commerce also revised downward its first quarter data for GDP growth from 1.1 per cent to just 0.8 per cent.

The uneveness of data has kept analysts guessing.

But this was exacerbated by the uncertainty within the FOMC itself.

The Federal Reserve’s Open Market Committee (FOMC) remains cautious in its appraisal of the US economy and in response to speculation it could raise interest rates in September, minutes from its meeting last month have shown.

The minutes showed there was little consensus whether to raise rates in September, partially reflecting the uneven data received about the US economy.

In the minutes, released earlier today, the FOMC acknowledged that “total nonfarm payroll employment increased briskly in June, but the increase for the second quarter as a whole was noticeably slower than in the first quarter”.

It noted that the unemployment rate rose to 4.9 per cent in June, partly reversing its decline in the previous month, indicating that for every bit of encouraging data there were statistics that were less so.

The next Federal Reserve meeting is scheduled for September.

The BRICS Post with inputs from Agencies.