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Yellen: Change In Target Range Could Be At Any Meeting

By Neils Christensen of Kitco News
Tuesday February 24, 2015 10:50 AM

(Kitco News) - The Federal Reserve could end up raising rates sooner than the market is expecting, according to Fed Chair Janet Yellen’s prepared statement before the U.S. Senate Committee on Banking Housing and Urban Affairs.

Although she reiterated that the Federal Reserve can be “patient” in normalizing its monetary policy and any changes is data dependant. She added that 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.”

“However, it is important to emphasize 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. Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting,” she said in her opening statement.

Jim Wyckoff, senior technical analyst from Kitco.com noted that gold prices fell, on her prepared remarks. Comex April gold futures pushed to a session low of $1,190 an ounce following the statement, but have since recovered. However, the drop was short-lived as some analysts have noted that her comments were fairly balanced.

Looking at economic growth, in her statement, Yellen said the committee has seen an improvement in the U.S. economy with the labor market “improving along many dimensions.” She also added that improving domestic spending is also helping to boost the nation’s economic growth. However, she continues to note that the housing sector continues to be a drag.

Yelllen also touched on the dramatic drop in oil prices, saying that although it will hurt energy producers, it will have a net benefit for the overall economy.

“…[I]t will likely be a significant overall plus, on net, for our economy. Primarily, that boost will arise from U.S. households having the wherewithal to increase their spending on other goods and services as they spend less on gasoline,” she said.

Although Yellen remained fairly optimistic on the U.S. economy, she said that disappointing foreign growth, and changes in monetary policy abroad, has increased the risk to domestic growth.

“Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain economic activity,” she said.

Looking at inflation expectations, Yellen said that according to forecasters, inflation expectations have remained stable. She added that the committee expects inflation to continue to fall lower in the near-term “rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.”

Although the Fed is looking at normalizing interest rates, Yellen added that this raising cycle could be lower than historical norms.

“It is possible, for example, that it may be necessary for the federal funds rate to run temporarily below its normal longer-run level because the residual effects of the financial crisis may continue to weigh on economic activity. As such factors continue to dissipate, we would expect the federal funds rate to move toward its longer-run normal level,” she said.

Paul Ashworth, chief U.S. economist, noted that Yellen’s upbeat tone regarding the labor market and market conditions along with her discussion on forward guidance suggests that the Fed could begin raising rates at the June meeting.

“Yellen gave a clear steer that the Fed is close to dropping the language that it can be "patient" about starting to normalize interest rates. After that, rate hikes will be entirely data dependent and considered on a meeting-to-meeting basis,” he said. “Overall, the Fed is clearly getting close to the first rate hike, which we expect in June. Beyond that, we anticipate that rising wage and core price inflation will prompt the Fed to hike the fed funds rate to between 1.00% and 1.25% by end-2015 and 2.75% to 3.00% by end-2016.”

Eric Green, head of U.S. rates & economic research at TD Securities, said that Yellen provided a fairly balanced view of the economy in her prepared statement and is in-line with the committee’s current thinking.

“This feels like a glass is half full discussion,” he said describing her comments. “Yellen is not bent on raising rates at any cost, that is clear, and she will do so when she is "reasonably confident" that the timing is right. Reasonably confident is Fedspeak for suggesting that the threshold to higher rates may not be as high as the dovish tone of the minutes might suggest.”

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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