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Fed Has No Reason To Change Monetary Course – Yellen

By Neils Christensen of Kitco News
Wednesday March 19, 2014 4:33 PM

(Kitco News) - As long as the labor market continues to show improvement and inflation remains below 2.0% the Federal Reserve has no reason to change its current monetary policy course said Fed chair Janet Yellen.

During FOMC press conference, Yellen made several references that the labor market continues to improve, which was also reflected in the central bank’s monetary policy statement.

“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” said the Fed’s monetary policy statement.

Although there is still significant slack in the labor market, Yellen said the committee has seen some faster-than expected progress. She added the progress made in employment was one of the reasons why the committee decided to revise its forward guidance and include a “wider range” of information.

Although weather has been an “important factor” in weaker-than-expected first quarter growth, Yellen added that the committee is starting to see those effects being washed. From December 2013 to now, Yellen said there has not been a major change in the committee’s outlook.

Yellen admitted that the Fed probably “over did” the optimism in January.

Although the Fed remains optimistic that the economy is headed in the right direction, Yellen reiterated that tapering is not on a “pre-set course.” However, she added that it would take an extreme shift in the data to signal a change in the current course.

Two factors that would have to change would be that the outlook for the labor market would have to weaken and there would have to be a shift in inflation expectations.

With no significant changes in the outlook, Yellen said the Fed could completely exit its quantitative easing strategy by the fall. However she added that the central bank still forsees low interest rates for a considerable period.

When asked what exactly a “considerable period” means, Yellen responded by saying that the time frame is hard to determine but implied that it could be around six months.

Millan Mulraine, deputy head of U.S. research and strategy for TD Securities, said that markets have keyed on that time frame, which means they could start pricing in a rate hike by the summer of 2015.

“It is hard to know if Yellen wanted the market to start thinking of mid-2015 hike, but that is what was implied by her statement,” he said.

Economists and analysts have also started anticipating higher rates in 2015 after reviewing the individual interest rate projects of the Fed members. Avery Shenfeld, senior economist from CIBC World Markets pointed out the media projected funds rate for the end of 2015 has moved up to 1.0% after being at 0.75% previously.

Yellen downplayed the significant of the interest rate “dot plot” projects. She said that they were useful summaries of individual member’s views but “it would not be appropriate to read too much into them.”

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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