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Fed’s Yellen flags rate hikes on ‘meeting-by-meeting’ basis

The Federal Reserve is preparing to consider interest rate hikes “on a meeting-by-meeting basis”, Fed chair Janet Yellen told a congressional committee, a subtle shift of emphasis that helps lay the groundwork for the Fed’s first rate hike since 2006.

In remarks to the Senate Banking Committee, Yellen described how the Fed’s rate-setting policy committee will likely proceed in coming months – first by removing the word ‘patient’ in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting.

That approach could open the door to an interest rate increase as early as June, though investors interpreted Yellen’s testimony overall as likely indicating a later date for liftoff.

By the end of her two-hour appearance before the Senate Banking Committee, short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October, according to data collected and analysed by CME FedWatch.

Yellen still feels the job market is not fully repaired

Yellen, however, said that even as the Fed refines its language in coming weeks, investors should not construe that as a sign the central bank is wed to a rate hike at any particular meeting. Rather, she said, when the word ‘patient’ disappears, it means the Fed will merely have full flexibility to act if it judges the economic data warrant it.

The Fed has been struggling in recent months to move away from the sort of forward guidance it has relied on through the crisis to influence market behaviour, without at the same time triggering a market overreaction with each tweak to its policy statement. Yellen’s comments marked another step in that process.

“If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Yellen said.

“Before then, the committee will change its forward guidance. However, it is important to emphasise that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.”

Yellen’s discussion of forward guidance was part of prepared testimony that included a broad overview of a US economy that appeared to be surging forward with strong job growth and a continued post-financial crisis expansion – conditions largely consistent with a rise in interest rates later this year.

Analysts said the testimony did little to nail down the likely date of a rate hike, with her testimony and answers to questions veering between confidence in a ‘solid’ recovery and continuing concerns about weak wages and other signs the labour market is not fully healthy.

Just completing her first year as Fed chief, Yellen said she felt US labour markets and other key economic indicators “have been increasing at a solid rate”. However, she said she still feels the job market is not fully repaired, and that the US outlook remains somewhat clouded by a weaker-than-hoped-for global economy, stalled wage growth, and falling inflation. None of those factors on their own may be enough to keep the Fed from raising interest rates later this year.

Rates have been near zero since the financial crisis hit in 2008, part of a record effort by the central bank to repair the damage of the Great Recession.

But the lack of inflation has made some Fed policymakers hesitant to commit to raising rates until they are more certain the US is not headed down the same path as Europe or Japan, mature industrial economies that are struggling to maintain growth.

The Fed considers a steady 2 per cent annual inflation rate a sign of overall economic health – consistent with its own ability to return interest rates to a normal level, and not so high or low that it distorts household and business spending and investment decisions. Though the current weak prices are considered likely to be a temporary result of the collapse in oil prices, doubts remain.

Several policymakers, including some centrists on the committee, have said they feel an interest rate increase should be on the table by June, after the intervening Fed policy meeting in April.

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