Yellen continues to stress a gradual approach - Lowes Financial Management
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Yellen continues to stress a gradual approach

30/03/2016 … Author:

Janet Yellen, chair of the US Federal Reserve, last night continued to stress that any increase in interest rates will be at a gradual and cautious pace. In what some believe was one of her clearest speeches to date, Yellen also provided a list of conditions which she believes the Federal Reserve needs to see before they consider raising rates. These were:

• Foreign economies and financial markets need to stabilise.
• It is unlikely that the US dollar could strengthen any further. Further currency appreciation would likely depress inflation and exports, damaging the US manufacturing sector.
• Commodity prices need to stabilise so that commodity producing companies can find a base from which to re-stimulate growth.
• The US housing sector needs to make a larger contribution to US output.
• Inflation: Janet Yellen remains sceptical that the recent rise in core inflation will prove durable and therefore this remains under close scrutiny by the central bank.

After leaving the target for the federal funds rate, the key US interest rate, at between 0.25% and 0.50% earlier this month, the Federal Reserve has clearly demonstrated that any future decisions with regard to interest rates remain data dependant. Although one half of the dual mandate has almost been met, with unemployment at 4.9%, only 0.1% above what is considered full employment, there clearly remains concern that the other half of the dual mandate, price stability (inflation), remains some way off. The central bank next meets April 26th to the 27th to discuss monetary policy.

Equity markets responded positively to the news, with the S&P 500 closing up 0.88%. European indices have also responded positively this morning, with the FTSE 100 up almost 1.4% and the EStoxx 50 over 1.4%. Asian markets, with the exception of Japan, have also posted gains, with strong performances from Hong Kong in particular, benefiting from a weaker US dollar following the news.

Markets are now likely to be focussed on the conditions for higher interest rates which Janet Yellen has provided. This could lead to continued volatility in asset classes, across equities, bonds and currencies, as analysts try to determine what they think economic data releases mean for future rate decisions.

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