Fed Chair Yellen sees rate hike ‘later this year’


The Fed­eral Re­serve left its bench­mark in­ter­est rate un­changed at near zero Wed­nes­day, but Chair­woman Janet Yellen said the first hike in nine years would likely come “later this year.”

Af­ter a two-day pol­icy meet­ing, the U.S. cen­tral bank’s Fed­eral Open Mar­ket Com­mit­tee (FOMC) again de­murred on an in­crease in the fed­eral funds rate, even as the FOMC saw the econ­omy re­bound­ing from the con­trac­tion in the first quar­ter.

But Yellen


the econ­omy still has some weak points and the FOMC needs to see more ev­i­dence of im­prove­ment be­fore em­bark­ing on what she stressed would be a se­ries of “grad­ual” rate in­creases.

“Room for fur­ther im­prove­ment re­mains,” she said in a post­meet­ing news con­fer­ence.

“My col­leagues and I would like to see more decisive ev­i­dence that a mod­er­ate pace of eco­nomic growth will be sus­tained, so the con­di­tions in the la­bor mar­ket will con­tinue to im­prove and in­fla­tion will move back to 2 per­cent,” she said.

Af­ter the sur­prise win­ter

stall, the Fed de­scribed U.S. eco­nomic growth as back to a “mod­er­ate” pace dur­ing the past two months.

It trimmed its 2015 gross do­mes­tic prod­uct growth forecast to 1.8-2.0 per­cent, sharply down from March’s out­look, to ac­count for the set­back in the first quar­ter.

But the pol­icy mak­ers ex­pect growth to pick up mod­estly to a 2.4- 2.7 per­cent pace next year and the un­em­ploy­ment rate — a key ref­er­ent for mon­e­tary pol­icy — to slip slowly from the cur­rent 5.5 per­cent to as low as 5.2 per­cent by year- end and 4.9 per­cent in 2016.

Along with an ex­pected re­bound in in­fla­tion, Yellen said this would war­rant an ini­tial tight­en­ing of mon­e­tary pol­icy be­fore the end of the year.

Dovish Fed

The fed funds rate has been locked at the zero level since the 2008 fi­nan­cial cri­sis, in an ex­tra­or­di­nary ef­fort to stim­u­late growth with easy money.

Pre­dic­tions made by the in­di­vid­ual FOMC par­tic­i­pants in­di­cated most ex­pect the rate to rise above 0.5 per­cent by De­cem­ber. That likely sig­nals two 0.25 per­cent­age point in­creases from Septem­ber, most an­a­lysts said.

“Based on this as­sess­ment of the econ­omy, Fed of­fi­cials ex­pect the bench­mark fed­eral funds rate to end the year at 0.625 per­cent, the same as be­fore, and con­sis­tent with two rate hikes later this year,” said Na­ri­man Behravesh, chief economist at IHS.

Even so, an­a­lysts said the FOMC be­trayed a some­what sur­pris­ing dovish turn, af­ter top of­fi­cials in­clud­ing Yellen had ap­peared ea­ger in re­cent weeks about mov­ing to the ini­tial “liftoff” to­ward a nor­mal­ized mon­e­tary pol­icy.

Yellen said there were still signs of cycli­cal weak­ness in the econ­omy, es­pe­cially in the la­bor mar­ket.

Wage growth is slow, and the la­bor force par­tic­i­pa­tion rate re­mains low, she noted.

And while not mak­ing a link to mon­e­tary pol­icy, she voiced con­cerns about the fall­out if Greece and its cred­i­tors can­not reach a deal on more bailout fund­ing for Athens.

The dovish­ness was clear in the shift in the FOMC mem­bers’ rate fore­casts for the end of 2016. In March the me­dian pre­dic­tion was 1.875 per­cent. Wed­nes­day’s medi- an for De­cem­ber 2016 was 1.625 per­cent, a much gen­tler curve.

As a re­sult, U.S. stocks rose, with the S&P 500 swing­ing from losses to end up 0.2 per­cent, and the dol­lar fell 0.8 per­cent against the euro.

The prospect of a rise in U.S. in­ter­est rates has sparked tur­moil in global mar­kets for two years, with volatile cur­ren­cies and cap­i­tal flows chal­leng­ing pol­icy in many emerg­ing-mar­ket coun­tries.

Amid wor­ries about more volatil­ity, Yellen sought to down­play the im­por­tance of the first rate hike.

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