Thursday, September 24, 2015

Yellen gives strongest clue yet about interest rate rises | US GDP later today will be closely watched

Janet Yellen, Chair of the US Federal Reserve, gave a speech at the University of Massachusetts-Amherst last night (GMT time) in which she gave the strongest indication so far that US interest rates will start to rise before the end of 2015. This provides the market with two possible dates, October 28th or December 16th, for the start of the cycle. These are the days on which the remaining FOMC monetary policy meetings for 2015 terminate.

In her speech, Ms. Yellen said that most of the FOMC committee members will support the 2015 commencement of the rising cycle. At the last monetary policy meeting, earlier this month, some 13 out of 17 members were in favour of raising rates, but the decision was taken to hold off pending further economic results. It would now appear that these are in.

On the vexed question of deflation, the chair of the Fed said that the factors giving rise to this, low energy prices and a relatively strong dollar, were ‘transitory’. In an apparent attempt to deal with the psychological effects of the first rise, she said that the “first hike would have only minor implications for the markets, paling in comparison with the trajectory of increases on a long-term basis”.

Right after Ms. Yellen made these remarks, the EURUSD pair reacted to the downside (see chart above). This, of course, means a strengthening dollar.

US GDP later today will be closely watched

The words of the Fed chair have given added significance to the release of the latest Gross Domestic Product (GDP) figures for the USA, which will be released later in the global day today. This is expected to be 3.7% on an annual basis. A result coming in at or near this target for the GDP figures will put the finishing touches to 2015 US interest rate rise expectations.

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