Talking Points:
- US Federal Reserve Chair Janet Yellen claims Fed remains on track to raise rates this year
- Several FOMC members echoed liftoff sentiments, note economy’s readiness
- Fed Funds Futures price a September rate hike at 20%, December hike at 70%
The United States Federal Reserve hasn’t raised rates since June of 2006 however we may be closer to the end of this streak than many expect. Fed Chairwoman Janet Yellen reiterated her belief that a hike in 2015 was appropriate in her semi-annual testimony to the House financial panel Tuesday. And, Yellen wasn’t alone when it came to her hawkish comments. A range of Fed members speaking this past session echoed a tightening monetary policy lean.
Janet Yellen’s prepared testimony brought upbeat news on the economy. She noted the Fed is likely to raise its main interest this year assuming forecasts for stronger growth and lower employment. Yellen added the timing of the liftoff takes a backseat to pace. She emphasized policy will remain “highly accommodative for some time.” Yellen’s comments come after the Federal Open Market Committee’s forecasts, which were updated at the June rate meeting and implied two quarter-point rate rises this year. She noted fed liftoff will truly gauge the market’s economic recovery and said growth abroad could provide, “additional support for U.S. economic activity.”
Kansas City Fed President Esther George, speaking early in the Asia session, said “it’s time” when asked for her thoughts on a fed liftoff. George has been on the hawkish end of the spectrum for some time, and has repeatedly advocated for a shift in monetary policy. George assessed, “A 25-basis-point increase in the fed-funds rate should not have an adverse effect on the economy.”
President of the Federal Reserve Bank of Cleveland Loretta Mester spoke two hours after Yellen and echoed, "The economy can handle an increase in the fed funds rate.” She referenced a small increase and said with the economic progress that has been made near zero interest rates can be stepped back from.
John Williams went as far as to say, “September would be a very plausible time to start liftoff.” President of the San Francisco Federal Reserve, Williams has until recently been considered a dovish official. Last week he proposed seeing inflation figures before making a decision. However, speaking an increasingly decisive tone, Williams said the U.S. economy is likely to be at full employment “well before” 2016.
The 30-Day Fed Funds Futures by from the CME – used to hedge against expected changes in interest rates – shows the market remains dubious. Markets are pricing an independent 25-basis-points hike in September 2015 at 20%, an October 2015, at 40% and a December 2015 rate hike at 70%. Futures are priced on the basis of 100 minus the effective federal funds rate. September, October, and December stand at 99.835, 99.785, and 99.710 respectively.
