Fed hints at interest rate hikes but urges caution

The US Federal Reserve chair Janet Yellen has said the Fed should proceed cautiously before raising interest rates, having contributed to the decision to delay a rate hike twice this year.

Global uncertainty, including China’s economic slowdown and low oil prices, have contributed to the decision of delaying an interest rate hike in both January and March, Yellen has said she expects “only gradual increases” to be warranted in the future [1].

The US central bank left interest rates unchanged two weeks ago and signalled its concerns about the economy by forecasting two further rate hikes this year, down from four at the December meeting; when the Fed raised rates from near zero for the first time in almost a decade [1].

Following the announcement, Yellen sent the dollar index down by 0.8; its biggest one-day fall in two weeks, to 94.79, a 12-day low [2].

Talking of a potential rate hike, Westpac Bank Senior Currency Strategist Sean Callow said: “Such a cautious stance suggests a rate hike in April is unlikely, and there are increased doubts that the Fed will be ready to move in June” [2].

Although, the caution is not meant as a scare tactic as the Head of the San Francisco Federal Reserve, John Williams, said the US economy was doing “quite well” [3].

Yellen did also address other tools the Fed has at its disposal if the US economy was to suffer a downturn, including asset purchases, forward guidance and negative interest rates, which have been used in Europe, saying they helped prevent the recession from becoming worse.

“They have been effective policy, they have made a difference and inflation may have been lower and unemployment higher – by noticeable amounts – had we not employed those policies,” she said [3].

[1] The Guardian. ‘Fed officials hint at interest rate hikes but Janet Yellen urges caution’.
[2] Reuters UK. ‘Dollar drops on doubt US rares will rise at all in 2016’.
[3] BBC News. ‘Yellen: Fed should ‘proceed cautiously’ with rates rise’.