Rate hike coming?

US Fed chair opens the door to a rise

Federal Reserve chairwoman Janet Yellen has opened the door a little wider to a rate hike, after voicing optimism about the US economy at her eagerly awaited speech at the Jackson Hole summit of central bankers, says an analyst.

Markets have been watching closely for signs the Fed is ready to start raising US interest rates, a move that would lift the US dollar and push down the kiwi. Yellen said the US economy was nearing the Fed’s goals of full employment and stable prices.

“Based on this economic outlook, the FOMC [Federal Open Market Committee] continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”

Craigs Investment Partners head of private wealth research Mark Lister said a rise in US interest rates would cause some volatility.

“That’s fine with me, because I think we should all be very happy if the world begins to slowly wean itself off the low-interest rate life support, and move back toward normality,” Lister said.

“We might see a bit of short-term market panic as people are reminded that interest rates won’t be at zero forever, but I think we should focus on the fact that the Fed obviously thinks the US economy is strong enough to withstand a rise in interest rates.”

After trading as high as US73.35c on Thursday the kiwi was at US72.38c on Saturday after Yellen’s speech, before edging higher to US72.41c.

“I think for us here in New Zealand, another big positive would be that the US dollar continues to strengthen, which would see the NZ dollar fall a little, boosting the export sector and dairy prices, while taking some pressure off the Reserve Bank,” Lister said.

For investors, it was a timely reminder that interest rates might not always be at rock bottom, he said.