Janet Yellen Reassures Traders

In a quite firm manner, Ms Janet Yellen today stated that, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” The Fed Chair Ms. Janet Yellen said in her speech delivered on Friday at the Jackson Hole Symposium. “Our decisions always depend on the degree to which incoming data continues to confirm the [Fed’s] outlook,” she added.

In the much-anticipated speech delivered today at the central bank's annual Jackson Hole summit, Fed Chair Janet Yellen expressed her optimism about the economy and an expectation that interest rate hikes are ahead. Speaking as the market wondered when the Fed will resume a policy tightening that began in December, Yellen issued some cautionary tones, but pointed to more increases on the horizon.

If the Fed fails to take any action concerning a rates hike in September, it has two more meetings this year, one in November right before U.S. elections and another in December. Her comments imply that she predicts a move at one of these two meetings if the central bank doesn’t raise rates in September. Investors seem to have had their hopes lifted by Ms. Yellen’s modest optimism about the economic outlook. Stocks rose right after reports of her statements were released. Yields on 10-year Treasury notes also saw an initial rise, but then pulled back. Analysts said the eventual fall in Treasury yields came due to remarks made by Ms. Yellen that rates would stay lower in the long run.

The Federal Open Market Committee "continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives," Yellen said in prepared remarks.

Yellen was most confident in the American labor market, and it’s easy to see why. Wage growth is finally on the rise, as the U.S. economy has added on average 190,000 new jobs monthly this summer. That’s more than enough to tighten labor markets, and should be good news for consumer spending as well.

After she spoke, Vice Chairman Stanley Fischer said on CNBC that the August jobs report scheduled to drop next Friday "will probably weigh in our decision, along with other data that may come in."

Loretta Mester, who is a voting member of the FOMC, told CNBC before Yellen spoke that she expects to some signs of strengthening in the U.S. economy in the second half of 2016, James Bullard, another voting member of the FOMC also told CNBC earlier Friday that, “the Sept. 20-21 Fed meeting might be a good time to raise rates”. Government bond yields quickly moved higher after Yellen's remarks were released, while stocks were lower in early afternooon trading. The U.S. dollar was flat against the euro but down 0.3% against a basket of global currencies.

"The pre-prepared text from Yellen's speech at Jackson Hole today didn't necessarily offer much in the way of surprises but it did confirm one thing, there is now a clear and public hawkish consensus building within the Fed and Chair Yellen is on board," said Craig Erlam, senior market analyst at currencies trading platform OANDA.