Fed’s Williams: don’t let the economy ‘party’ go on too long

What does the Fed need to see so it can raise its interest rate?

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In fact, the pronouncements are simply confusing the market, they said.

Fed officials have signaled over the past week that they were on course to raise short-term interest rates later this year for the first time since 2006.

While Federal Reserve officials from Chair Janet Yellen to William C. Dudley to John Williams say the central bank will probably raise interest rates this year, the debt market indicates it won’t happen until 2016.

The data supported the case that the United States economy may be able to withstand a rate hike. Yet they expect a modest acceleration in the final three months of this year, believing that strong gains in employment will provide people with more money to spend.

The Fed’s twin objectives for its monetary policy are to achieve maximum employment and stable inflation, which it targets at 2 percent. The markets remain nervous, which continues to point to maintaining a more diversified portfolio.

But there’s concerns that the global economic outlook – which deterred the Fed from a September rate hike – won’t change before the Fed’s October meeting.

The Fed initiated a series of unprecedented accommodative policies in the wake of the 2008 financial crisis and now central bankers are anxious to wind down those programs and return US monetary policy to “normal”. The BoE and the Fed are the only two major central banks expected to tighten policy soon and there has been a lot of debate over the timing of their initial moves. Spot gold closed at $1,146 per ounce on Friday, down 0.7% from the previous close, having climbed 2% on Thursday, its biggest one-day rise since January.

Consider the August report: the average hourly wage paid to US workers in August rose just 0.3% over July’s hourly wage. “In contrast, raising rates too late would force us into the position of a steeper and more abrupt path of rate hikes, which doesn’t leave much room for manoeuver”.

This year, the global slowdown and the strength of the dollar has kept a lid on US inflation, which the Fed is watching closely to justify a rate hike. “But on the back of Yellen’s comments today the risk is that the Fed pulls the trigger in October“.

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“I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system”, he said at the UCLA Anderson School of Management. While delivering a speech on inflation dynamics at the university’s Philip Gamble Memorial Lecture, Yellen noted that the inflation shortfall is likely to be transitory, as one-off factors such as lower energy prices and weaker imports due to a stronger dollar abate.

Impact of Fed's interest rate move will be felt beyond markets