Yellen expected to outline Fed’s plans for four more rate rises
JANET YELLEN is expected to tell markets to prepare for higher interest rates as soon as this week.
The chairman of the Federal Reserve is set to use the Jackson Hole conference of central bankers as a platform to make sure markets do not panic as interest rates edge up, and she stops rolling over the stock of bonds bought under the quantitative easing programme – something which is expected to start in October.
“Clearly this is a prime opportunity for Ms Yellen to tell markets that the Fed expects to keep raising rates, despite the recent run of soft core consumer price inflation numbers, because the labour market cannot be allowed to tighten much further,” said Ian Shepherdson at Pantheon Macroeconomics.
Currently when bonds mature the Fed reinvests the money, maintaining its stock of quantitative easing. It is expected to gradually stop doing that from October. But markets might not be prepared for the full impact of this, or of the full rise in rates which the Fed has outlined, meaning Ms Yellen may want to force the point at the conference, which starts on Thursday.
“Markets expect one rise in interest rates over the next 18 months but the Fed says it expects four rises, so it could become a nasty environment,” said James Knightley, chief international economist at ING. However, the Fed has said that the speech, which takes place on Friday afternoon UK time, will be on the topic of financial stability.
This could include the effect of tighter monetary policy, but could also indicates the main thrust of the symposium in Wyoming may be slanted towards banks and regulation. “We expect her to defend the current regulatory regime for large financial institutions,” said economist Lewis Alexander at Nomura.
“But she may also argue that the need to promote financial stability may be another reason for the Federal Open Markets Committee to increase their targets for short-term interest rates later this year, even if inflation is slow to pick up.”
Mark Carney is not attending this year’s conference. Ben Broadbent, the Bank of England’s deputy governor for monetary policy, will be at the event which is run by the Kansas City Fed, but will not make a speech or participate in the public panel discussions.
Meanwhile, Mario Draghi will also attend in order to make a late night speech on Friday. The European Central Bank boss is not expected to signal any major changes in policy, but could give some details of plans to cut back on monetary easing in future as the eurozone economies are growing at their fastest pace in six years.
The ECB has cut the pace at which it buys bonds under its quantitative easing programme and is expected to reduce purchases further below the current level of €60bn per month.