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Tuesday, February 24, 2015

Fed's Yellen flags rate hikes on 'meeting-by-meeting' basis

The Federal Reserve is preparing to consider interest rate hikes "on a meeting-by-meeting basis," Fed Chair Janet Yellen told a congressional committee today, a subtle shift of emphasis that helps lay the groundwork for the Fed's first rate hike since 2006.

In remarks to the Senate Banking Committee, Yellen described how the Fed's rate-setting policy committee will likely proceed in coming months - first by removing the word "patient" in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting.

That approach could open the door to an interest rate increase as early as June, though investors interpreted Yellen's testimony overall as likely indicating a later date for liftoff. By the end of her two-hour appearance before the Senate Banking Committee, short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October, according to data collected and analyzed by CME FedWatch.

Yellen, however, said that even as the Fed refines its language in coming weeks, investors should not construe that as a sign the central bank is wed to a rate hike at any particular meeting. Rather, she said, when the word "patient" disappears it means the Fed will merely have full flexibility to act if its judges the economic data warrant it.

The Fed has been struggling in recent months to move away from the sort of forward guidance it has relied on through the crisis to influence market behavior, without at the same time triggering a market overreaction with each tweak to its policy statement. Yellen's comments on Tuesday marked another step in that process.

"If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis," Yellen said.

"Before then, the committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings."

Yellen's discussion of forward guidance was part of prepared testimony that included a broad overview of a US economy that appeared to be surging forward with strong job growth and a continued post-financial crisis expansion - conditions largely consistent with a rise in interest rates later this year.

Analysts said the testimony did little to nail down the likely date of a rate hike, with her testimony and answers to questions veering between confidence in a "solid" recovery and continuing concerns about weak wages and other signs the labor market is not fully healthy.

"I would suggest that Yellen is still keeping a very open mind, still in no hurry to give a signal that a rate hike is imminent," said Brian Dolan, head market strategist at New Jersey-based Drivewealth LLC.

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Tags:  Fed  Yellen  US  rates  economy  





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