Fed chair: Rate hike around the corner

Despite flaws in the US labour market, Federal Reserve chair expects first rate hike before 2015 ends

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

The Federal Reserve chair Janet Yellen on Friday said the Fed may raise interest rates during this year as the US economy shows signs of improvement, with unemployment rates falling and inflation heading towards a desired target.

She said, however, these factors are still open for a change in course.  

"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," Yellen said in a speech in Cleveland.

Although improvements in the US economy have been cited, the Federal Reserve chair still warned that “the economy and inflation remain highly uncertain” and that the Fed could take precautions which may result in a delay of the first step of the much anticipated rate hike.

Employment is one of the most important pieces of data and the Federal Reserve is monitoring it closely. Although there has been signs of improvement, the US labour market still remains frail. 

According to an official report for June, US employers added 223,000 jobs last month, down from the revised 254,000 gain in May as the unemployment rate fell to 5.3 percent.

“We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years," Yellen stated.

Although the Fed is setting the stage for a rate hike in September, some analysts believe January 2016 is more likely. The Fed chair has not confirmed an official date until now however, the consistency in Yellen’s speeches suggest that Fed could increase rates later this year. 

Economists have also been wary of the impact of recent events choking China and Greece, believing that instabilities in the global economy have the power to curb growth in the US. However, Capital Economics notes that a “Fed lift-off won't be delayed by Greece or China.”

Despite concerns, Yellen assured that the most important factor in determining the best time for hike rates are when US strengthens as expected.

If rates are to be increased anytime soon, the initial step will have a small impact. After this point, gradual increments will be added. 

TRTWorld and agencies