Janet Yellen, chairman of the Federal Reserve bank, hinted Friday that the Fed has renewed interest in raising interest rates, following increased economic growth and signs that the economy is trending with the promise for continued appreciation. This comes as market backlash has viewed the Fed lowered rates as negative signs that the economy has failed to improve since the financial meltdown of 2008; in which the Fed, slashed the federal fund’s rate to near-zero and followed that up with quantitative easing which ballooned the balance sheet to $4.5 trillion.
However, as Janet Yellen noted in the past, the increased rates have become a gradual necessity to ensure a degree of wiggle room, in the event the market were to suffer another recession or pullback. As Yellen said at a speech in Chicago, “we currently judge that it will be appropriate to gradually increase the federal fund’s rate if the economic data continue to come in about as we expect.” Later adding that “indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal fund’s rate would likely be appropriate.”
In her speech, Yellen noted that core inflation is at moderate 1.7%, which is a tad under the Fed’s 2% target, while job creation is at pace to exceed the 4.8% unemployment rate, alongside receding global economic risks that have subsidized fears and promoted investor confidence. However, these comments come to no surprise amongst investors and financiers, as continued growth and subtle gestures from the Fed have prompted a positive outlook on the future of the market. As a result, much of Yellen’s speech had been priced into the underlying financial instruments, bonds, and stocks, prior to her announcement. As Quincy Krosby, market strategist at Prudential Financial stated, “chair Yellen confirmed that economic conditions including inflation goals and employment levels have met the Federal Reserve’s dual mandate, the March meeting is no longer live — it is alive.”
Furthermore, Janet Yellen confirmed sentiment that would suggest three possible rate hikes throughout 2017, which in turn increase the market probability of sentiment from nearly 78% to 82%, according to CME’s tracking tool of Fed Funds Futures. In addition, Yellen also made an indirect reference to the current political situation in Washington, highlighting Donald Trump’s call for expansionary fiscal policy, including massive tax cuts, and massive rollbacks of regulations accompanied by greater infrastructure spending to boost the sluggish economy.
The last rate hike by the Fed was experienced in December 2016, a year after its last preceding move and only the second hike in 10 years. Nonetheless, the current growth indications have central bank officials optimistic again, as Yellen would go on to say that “given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.” Later repeating that future rate hikes will remain gradual in the future, though adding that rate hikes “will likely be appropriate in the months and years ahead”
These signs from the Fed prove promising for the Trump administration economic policy, as reinforced optimism from investors and perceived growth in the future as a result of expansionary fiscal policy pave the way for massive appreciations within the market. As it stands the Dow Jones has currently trumped previous historical highs, having broken through pre-recession levels and reached highs of 21000 points. Looking forward, investors should feel reassured to the strength of the market, and the promise of continued growth on part of the White house, and the Federal Reserve ‘s policy.
Market participants should look forward to increased rates going forward and should stay alerted to Janet Yellen’s proposed rate hike later this week.