Federal Reserve Tells Congress Further Rate Hikes on the Way

A man looks at an electronic board showing stock information at a brokerage house in Beijing China

Janet Yellen is getting ready to feel the heat, and not just because it's July in Washington.

The New Zealand dollar was little changed, having traded in a 0.50 United States cent range for the past week, as traders await testimony from Federal Reserve chair Janet Yellen and USA inflation data to provide fresh impetus to the greenback.

The prepared statement by Janet Yellen repeats numerous previous statements: another hike and the balance sheet reduction are expected this week.

The interest rate forecast on federal funds is among the semi-annual monetary report by USA central bank to Congress. President Donald Trump has a chance to reshape the leadership of the monetary authority with both Yellen and Vice Chairman Stanley Fischer's terms expiring next year. She faces questions from lawmakers on Wednesday and will testify on Thursday before a Senate committee.

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In prepared remarks shared Wednesday, Yellen has a broadly positive take on the economy, noting an average of 180,000 jobs added every month so far this year and a drop in the unemployment rate to what the Fed considers its "long-term normal level".

Yellen noted that while the US labor market has continued to strengthen and while the USA economy appears to be growing at a moderate pace, the inflation has continued to run lower than the Fed's 2% long-term objective. Ms Yellen said the Fed was not considering raising the target inflation rate. This helped keep a floor under the stock market. "But if inflation does not rebound, the Yellen-led Fed may slow its pace of normalization". They haven't said when they'll start.

While there is a 50 per cent probability for the Bank of England to raise interest rates too before the end of the year, markets are expecting the central bank to strike a dovish stance after recent soft data and comments from policymakers. Meanwhile, indicators of future spending are "generally upbeat" with orders and shipments moving up, and sentiment indexes have "remained elevated", the report said.

The report didn't give clues to the sequence of Fed's subsequent rate hikes and beginning of reducing its massive balance sheet. Like many central banks, the Fed dramatically increased the size of its balance sheet as a result of the financial crisis, embarking on a quantitative easing programme.

Yellen downplayed a recent slowdown in inflation, which she blamed on temporary factors.

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