Fed Chair Janet Yellen struck a cautious tone during a speech late on Friday at a San Francisco Federal Reserve event, stressing that although interest rates would need to rise at some point this year, she saw a “gradual” rise for them after that. Yellen repeated the latest message by Fed speakers that a judgement would be taken at each separate meeting of the board and that the central bank would not embark on a series of predetermined rate hikes such as the 2004-2006 rate hike campaign when rates were increased by 0.25% at each successive Fed meeting from 1% to 5.25% (popping the US housing bubble in the process).
The Fed Chair therefore stressed again that there was little predetermined in the Fed’s future moves and that indeed rates could reverse course if it was deemed necessary. Furthermore, Yellen said that the peak of the coming interest rate cycle would probably be much lower compared to previous cycles. The economy was still relatively weak compared to historical experience, according to Yellen.
Yellen did acknowledge that the committee could not afford to wait until inflation nears the 2% target before starting to increase interest rates, which can be interpreted that it is not bound by the low inflation readings. Some indications of inflation being stable or firming up would be required however, as Yellen said the Fed would not tighten while core inflation or wages were dropping.
Seeking to divert attention away from the timing of the first rate hike, over which the market seems to be obsessing, the Fed Chair said that the pace of tightening was more important than the particular date of the first rate hike. Currently the market sees October as the most likely liftoff point for interest rates and economists that were forecasting a June rise have been forced to revise their predictions.
The US dollar was little changed right after Chair Yellen’s testimony, as the majority felt she had said little that was new and not in the March 18 Fed statement. Overall, market sentiment remains favorable towards the US dollar, even though it is recognized that the Fed is unlikely to raise rates quickly. Yellen again made reference to the negative effect that a strong dollar was having on exports.