Fra BNP Paribas:
US: Yellen sees stronger case for rate hike
Fed Chair Janet Yellen set the scene for a rate hike later this year, when she spoke on Friday at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. As long as “data continue to confirm the Committee’s outlook,” as Ms Yellen said, we think the FOMC will deliver a rate hike as soon as September.
Ms Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit”, gave insights into both short-term and long-term policy. She argued that the case for raising rates had risen in recent months, emphasising that the Fed has the necessary tools to support the economy in the next downturn.
Most on the FOMC believe the US economy is at or near full employment, and Chair Yellen is, unsurprisingly, on board with that characterization. She noted that the labor market is performing solidly at the moment and that broader measures of labor utilization have improved.
Ms Yellen listed some additional tools that future policymakers might want to consider, including “purchasing a broader range of assets” and alternative monetary-policy frameworks, such as price-level or nominal-GDP targeting. Chair Yellen noted that the Fed is not actively considering any of these options.
Historically, the Fed has cut interest rates by about 550bp in recessions, but in those instances, the fed funds rate started out “appreciably above the level consistent with the economy operating at potential in the longer run”. In other words, a portion of the Fed’s easing response reflected the “undoing of the earlier tight stance of monetary policy”. Policy may not be tight the next time a recession hits, so less easing could be needed.
While Chair Yellen gave no clear signs that a September rate hike was imminent, she noted that in light of the current labor-market situation and the outlook for economic activity and inflation, the case for raising rates had strengthened.
In our view, with payrolls growing at an impressive clip (we forecast a 215,000 increase in August’s nonfarm payrolls), we expect the Fed to deliver a rate hike as soon as September
