The Fed Is Eager to Begin Raising Rates and Returning to More Normal Policy
Janet Yellen, Federal Reserve Chair announced, in her most recent statement, that the US Central Bank will most probably start raising borrowing cost in following period of this year. Even if this will happen before inflation and wages will have returned to normal levels, Yellen gave assurance that the return to normal interest rates will be a gradual one.
The Fed has held the costs of short term borrowing near zero since December 2008. A potential downswing of inflation or wage growth could postpone the first increase, but the central bank’s chief believes that policymakers should not wait for the inflation to reach the two percent level goal in order to strain monetary policy.
Moreover, following the first rate increase, if incoming data will fail to support Fed’s foresight, the path of policy will be adjusted according to facts. Yellen stated that the timing and the direction of a Fed hike would also depend on the incoming economic data, but the general belief is that, with constant improvement in terms of economic conditions, an increased target range will be guaranteed by the second half of the year. This comes as a consequence of the unemployment rate dropping at 5.5 percent last month and Fed’s eager to return to a normal policy, after more than six years of loose monetary policy. A delay in bumping rates higher is considered to be a risk for stoking inflation.
On the other hand, traders of US rate future assume that the Fed will wait until October to raise rates. Alfonso Esparza, senior currency Strategist at Oanda, Toronto, characterized Fed policy makers as “pretty much a replay of last week’s statement”.