Fed’s Yellen seeks interest-rate hike

Bloomberg

June is out. July might be too soon. The Federal Reserve’s next interest-rate increase is coming, but even September isn’t a sure bet.
That’s the message investors and economists are taking from Chair Janet Yellen’s remarks. Her comments were the last the public will hear from a Fed official before the central bank’s policy-setting meeting next week.
In her remarks, Yellen was clear that she’s fairly sure the economy will improve enough to warrant another interest-rate increase. She also has lingering uncertainties that may take several months to resolve.
The Fed chair underscored her sense that the US economy still has forward thrust and that consumers were in a position to provide a “significant” step up in spending this quarter to propel overall growth. But she was silent on when another rate increase would be needed, playing down a June move and raising doubts about July.
“I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” she said in Philadelphia before the US central bank enters a self-imposed quiet period before its June 14-15 policy meeting.
The questions she raised about the disappointing May jobs report, the weak pattern of investment spending, international risks, and sagging inflation expectations could take months — not weeks — to resolve, making a rate hike when the policy committee meets next week less likely, economists said.
“The Fed needs to see a rebound in the second quarter followed by that extending into in the third quarter,” said Neil Dutta, head of US economics at Renaissance Macro Research LLC in New York, who predicts the Federal Open Market Committee will hold rates steady next week and in July.
If the committee keeps rates on hold next week, it will be the fourth consecutive meeting at which it has delayed a move, underscoring the unusual, gradual pattern of monetary policy in an economy that still bears deep scars from the recession.
US employers added 38,000 new jobs in May, data released by the Labor Department showed, the lowest monthly reading in
almost six years.
While Yellen remarked several times on her confidence in “positive forces” that would support job gains, and eventually inflation, she suggested that she needs confirmation of those trends.

Global Bumps
“An important question is whether the U.S. economy could continue to make progress amid fairly considerable global bumpiness,” she said.
On that note, she mentioned the risk of sharp shifts in global investor sentiment and said a British vote on remaining in the European Union could have “significant economic repercussions” which could spill over to the U.S.
That comment alone seemed to raise the bar for a June rate increase. The U.K. referendum will be held June 23.
In addition, Yellen said that she is paying “close attention” to weakness in indicators of future inflation.
The New York Fed’s survey of consumers for the three-year-ahead inflation rate has been in a range of 2.45 percent to 2.79 percent in the first four months of this year, down from about 3 percent in the same period a year earlier.
“If inflation expectations really are moving lower, that could call into question whether inflation will move back to 2 percent as quickly as I expect,” Yellen said, though she expressed confidence that inflation will rise so long as oil prices stabilize and the dollar doesn’t resume its rally on foreign exchange markets, which would dampen import prices.
“The message is she still wants to gradually move interest rates away from zero,” said Ward McCarthy, chief financial economist with Jefferies LLC in New York and a former Richmond Fed economist. “But Friday’s employment number was sufficiently scary in her mind that she became much less specific in terms of the timing of when the next rate hike might be.”