It’s been just about a week since Janet Yellen, the Fed Chair tried to keep the mood optimistic by taking off pressures of raising interest rates amidst a weak recovery in the economy.
Still when the Fed is ready to hike, it has adequate tools at its disposal including fixed-rate reverse repurchase agreements, which Dudley said he considers “effective” to help set a floor on rates. In comments Monday, William Dudley of the New York Fed encapsulated the contradictory viewpoints, repeating his colleagues convictions that rates should come up in 2015, while emphasizing that the decision should hinge on the data.
“Our base-case scenario is still that the Fed will begin to hike rates in December“, said Paul Ashworth, chief US economist at Capital Economics. Inflation, however, has remained well below the Fed’s 2 per cent target.
A few analysts felt the Fed Chairwoman was “selling hope” (that the inflation would rise) without actually specifying the steps to be taken to achieve it. For instance, Ms. Yellen said was even though inflation was running at “near zero” during the last year, she was “sure” it would rise up to 2 percent in the coming two or three years. Deutsche Bank is looking for a gain of 200,000 new jobs and the unemployment rate holding steady at 5.1 percent.
“While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed”, Rajan said.
In fact, the pronouncements are simply confusing the market, they said.
The FOMC members will have to have made it clear that they are ready for rate hikes.
Williams said that October remains an option for the first rate increase.
The US central bank delayed a rate hike at its September meeting in the face of uncertainty about the global economy, a market selloff in the USA and concern that inflation might fall further away from the Fed’s two percent target. Bullard believes that’s mostly a result of falling oil prices, and predicts that inflation will be at least 2 percent by the end of next year.
The Fed has held rates near zero since late 2008 to boost the economy through the worst recession since the Great Depression. Comments on Friday offered investors reassurance that recent tumultuous market conditions were not going to dictate Fed policy and that the recovery in the U.S. was still on track. The figures showed a 0.3% advance during August, below expectations of a 0.4% increase.