To conclude, standard empirical analyses support the FOMC’s outlook that, with gradual adjustments in monetary policy, inflation will stabilize at around the FOMC’s 2 percent objective over the next few years, accompanied by some further strengthening in labor market conditions. But the outlook is uncertain, reflecting, among other things, the inherent imprecision in our estimates of labor utilization, inflation expectations, and other factors. As a result, we will need to carefully monitor the incoming data and, as warranted, adjust our assessments of the outlook and the appropriate stance of monetary policy. But in making these adjustments, our longer-run objectives will remain unchanged--to promote maximum employment and 2 percent inflation.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Here are Yellen’s quotes on the pace of interest rate changes:
How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments. Moving too quickly risks overadjusting policy to head off projected developments that may not come to pass. A gradual approach is particularly appropriate in light of subdued inflation and a low neutral real interest rate, which imply that the FOMC will have only limited scope to cut the federal funds rate should the economy be hit with an adverse shock.
But we should also be wary of moving too gradually. Job gains continue to run well ahead of the longer-run pace we estimate would be sufficient, on average, to provide jobs for new entrants to the labor force. Thus, without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession. Persistently easy monetary policy might also eventually lead to increased leverage and other developments, with adverse implications for financial stability. For these reasons, and given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.
After last week’s Fed meeting, Yellen admitted the central bank did not really understand why inflation had not returned to target. In her Ohio speech, she says:
Key among current uncertainties are the forces driving inflation, which has remained low in recent years despite substantial improvement in labor market conditions. ...This low inflation likely reflects factors whose influence should fade over time. But .. many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent.
My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation. In interpreting incoming data, we will need to stay alert to these possibilities and, in light of incoming information, adjust our views about inflation, the overall economy, and the stance of monetary policy best suited to promoting maximum employment and price stability.
US Federal Reserve chair Janet Yellen has hinted at further rate rises, prompting renewed suggestions a December move is on the cards.
Last week’s Fed meeting seemed to indicate as much, and in a speech in Ohio Yellen said it would be imprudent to leave rates on hold until inflation reached 2%. But she added that the current uncertainties strengthened the case for gradual rate rises, although the Fed had to be careful not to move too gradually.
YELLEN : says fed should be wary of moving too gradually
The risk of a stock market fall seems to be growing, reckons Fawad Razaqzada, market analyst at Forex.com:
After Monday’s sell-off, Wall Street opened sharply higher as downbeat tech names found support on “bargain” hunting and amid short-side profit-taking. However, the gains appeared to be short-lived as at the time of this writing, the major indices were coming off their best levels again. I still think a major correction could be on the cards soon, possibly in the coming days.
With US stock markets holding near their all-time highs and volatility being suppressed to record low levels, I just can’t help but feel investors are becoming unjustifiably complacent. Valuations have already become overstretched and at some point even the most bullish of market participants will have to accept that. A growing number of analysts agree that the bullish run cannot continue rising at this pace for much longer, at least without a sizeable correction of some sort.
One also has to remember that the number one reason why stocks are where they are is because of the unprecedented era of cheap central bank money flooding the financial markets. But with the Federal Reserve set to normalise its balance sheet, monetary conditions are going to tighten in the US. While the Bank of Japan will pick up the slack, a growing number of other central banks are turning or have already turned hawkish. The Bank of Canada has already started raising interest rates, while the Bank of England is set to do so in the coming months. The European Central Bank will likely announce the start of its own QE tapering soon.
Investors remained cautious, in the wake of the continuing tensions between the US and North Korea and the outcome of the German election. So European markets ended the day little moved, while in the US, Wall Street lost some of its early gains but so far has remained in positive territory.
The dollar recovered but the euro remained weak, while oil slipped back from its 26 month highs as profit takers moved in. The final scores showed:
The FTSE 100 finished down 15.55 points or 0.21% at 7285.74
Germany’s Dax edged up 0.08% to 12,605.20
France’s Cac climbed 0.03% to 5268.76
Italy’s FTSE MIB was 0.18% better at 22,430.65
Spain’s Ibex ended down 0.26% at 10,189.6
In Greece, the Athens market dipped 0.29% to 740.37
On Wall Street, the Dow Jones Industrial Average is currently up just 9 points or 0.04%.
The pound remains ahead against the euro but lower against the dollar. Connor Campbell, financial analyst at Spreadex, said:
The euro continued to hog the limelight this Tuesday, as investors chew over the various German, French and Spanish issues facing the Eurozone.
Down half a percent against the dollar, the euro is now sitting at a fresh month low of around $1.178. Against sterling it is doing a tiny bit better; though the euro’s still at an effective 2 month low, it has halved its losses to 0.2%, forcing the pound back below €1.14.
Still to come this Tuesday is a speech from Janet Yellen, tantalisingly titled ‘Inflation, Uncertainty and Monetary Policy’. That’s potentially attention-grabbing stuff for investors – even if these kinds of talks can end up providing less insight than hoped for – with the dollar looking to extend today’s gains with a few juicy hawkish morsels.
Oil prices have fallen from their highs after profit takers moved in.
Brent crude had risen to more than $59 a barrel, its highest level since July 2015, on a combination of growing demand, Opec production cuts and Turkey’s threat to shut the pipeline that runs from Northern Iraq through Turkey to the port of Ceyhan.
But it has slipped back just over 1% to $58.39 as investors decided to cash in some of their gains.
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