Yellen hints at a US interest rate rise

Global stocks hit new highs early this week. The FTSE All World index, America’s S&P 500 and Britain’s FTSE 100 all hit all-time records, while European stocks reached a new seven-year peak. Relief over the deal with Greece, firmer Chinese data and remarks by US Federal Reserve chairwoman Janet Yellen all contributed to the bullish mood.

Yellen gave an upbeat assessment of the American economy, but also pointed out how low consumer price inflation was. The dollar and Treasury yields dipped (reflecting rising prices) after her remarks.

What the commentators said

Not for the first time, the Fed chair’s remarks were ambiguous enough to yield something for everyone. “It took a lot of skill… to ensure that both the hawks and the doves could claim victory after her testimony,” said Deutsche Bank.

The hawks would point to her upbeat tone on the labour market, and to her signal that the Fed will drop the word “patient” from its post-meeting policy statement when it reckons higher rates could be warranted at any time.

Previously, the Fed said “patient” meant it would wait for at least two meetings to move. On the other hand, doves highlight the absence of strong wage growth and low inflation.

The upshot, reckoned Hamish McRae in The Independent, is an increase in the cost of money in June. “Well, maybe a bit later, but almost certainly by the autumn.” Still, as so often, the Fed highlighted that it was dependent on the data in order to reduce the scope for a rise in rates to shock markets. “But when it comes to dependency on economic data, much depends on interpretation,” said the FT’s James Mackintosh.

A key uncertainty is whether wage growth will take off once “full employment” (meaning an unemployment rate of around 5.5%) is reached, as it has in the past. Another question is whether the unusually high numbers of part-time and discouraged workers will rejoin the labour market as the economy strengths, reducing the pressure for wage increases.

Will the Fed get it right? Investors who always wait with bated breath for central banks’ latest Delphic remarks should remember that “central bankers are not divine beings with supernatural powers”, said Satyajit Das on The Swiss central bank’s sudden U-turn on tying the franc to the euro is just the latest reminder of their fallibility. Don’t count on a trouble-free exit from the zero-interest-rate twilight zone.

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