Federal Reserve Chair Janet Yellen firmly dispatched hints from fellow board members that the next Fed Funds rate increase could come as soon as April, noting that it is appropriate for the central bank to "proceeded cautiously" because of the risks from the global economy.
“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” said Ms Yellen, speaking from prepared remarks at the Economic Club of New York on Tuesday.
“This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”
Markets responded immediately, equities and bonds surged, and the dollar fell against the euro and the yen. The yield on the benchmark 10-year bond dropped 8 basis points to 1.8035 percent its lowest close seen February 29th. The yield on the 2- year also fell 8 points to 0.7843, its smallest yield February 29th.
The Dow ended ahead by 97 points at 17,663 after having been down over 100 points on the open. The dollar lost more than a figure against the euro and the yen closing at 1.1289 and 112.70 respectively.
Yellen specified two risks in her speech, though neither is new and each was mentioned at the March FOMC meeting.
Growth in China is slowing and the uncertainties about how the economy will manage the transition from a heavy industry export dominated economy to one purportedly dependent on internal consumption for economic growth are large.
A second risk lies in commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy, she said. Though it seems plain that prices are following the declining path of global economic growth.
Since the March meeting, when the central bank reduced it 2015 rate hike estimates from four to two, the U.S economy has slowed markedly. U.S. gross domestic product slipped to a 1.4 percent annual pace in the fourth quarter from 2.0 percent in the third, and 3.9 percent in the second. The Atlanta Fed’s GDPNow estimate for the first quarter was revised sharply down to 0.6 percent from 1.4 percent primarily due to slower rates of consumer spending growth. February also saw disappointing results in retail sales, durable goods orders, capital spending, and personal income.
While the economy slows, inflation has picked up. The personal consumption expenditures price index minus food and energy rose 1.7 percent for the year ended February, the fastest pace in three years. The annual core CPI rate hit 2.3 percent the same month, its highest since May 2012.
Faced with a slowing U.S. economy, stagnant wages and consumption and rising inflation against a background of weakening global growth, perhaps it is no surprise that the Fed is hedging its bets on higher rates.
Chief Market Strategist
WorldWideMarkets Online Trading