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International

[ 2015-05-24 ]

US Governor paves way for rise in interest rates
The US recovery remains on track despite its weak
start to the year, the chairwoman of the Federal
Reserve has declared, paving the way for interest
rates to rise before the end of the year.

Janet Yellen dismissed the first- quarter slowdown
as “statistical noise” and claimed economic
headwinds were beginning to fade, leaving America
“well positioned” for growth. Given the resilient
outlook, she expected interest rates to rise this
year, ending six years at which they have been
near zero.

Ms Yellen’s bullish stance will allay fears that
the US economy was slowing after first-quarter GDP
fell to 0.2 per cent on an annualised basis,
equivalent to practically zero quarter-on-quarter
growth using Britain’s preferred measure.

A strong US economy is vital for the global
recovery and signs that it was coming off the boil
were threatening to dent confidence. The Bank of
England’s rate-setting meeting this month had
queried whether weak growth in the US, Britain and
China, the world’s second-largest economy,
indicated “a risk of a more persistent global
slowdown”.

Ms Yellen’s statement cast those concerns aside.
“If the economy continues to improve as I expect,
I think it will be appropriate at some point this
year to take the initial step to raise the federal
funds rate target and begin the process of
normalising monetary policy,” she said.

While saying that the outlook for the economy was
always highly uncertain, and expressing concerns
about persistently low inflation, she argued that
delaying a tightening until employment and
inflation hit the central bank’s targets risked
overheating the economy.

US traders had been expecting the rate rise in
December, but that could now be brought forward a
little. There had been expectations this year that
an increase could come as early as June.

Any move by the US will trigger speculation that
the Bank could follow quickly in the UK. Minouche
Shafik, the Bank’s deputy governor, hinted
yesterday that rate rises may not be far behind
the Fed in a speech in which she said there were
“encouraging” signs in wage and jobs data.

She said she expected productivity growth to
recover “over the next year or so” and for price
pressures to gather as workers gained confidence
and started demanding better pay rises.

Andy Haldane, the Bank’s chief economist, said UK
growth was “pretty healthy, pretty solid”.
Speaking to BBC radio, he said that rates would be
rising soon — but only to a new “new normal” of 3
per cent or 4 per cent, rather than the 5 per cent
to 7 per cent of the past.

Ms Yellen was not exclusively optimistic about the
US. She said recent figures suggested that the
pace of recovery “may have slowed” and that the
jobs market still had some healing to do, as
signalled by low wage growth and reduced
participation in the labour force. She warned that
some factors deterring investment, such as low
energy prices and risk-aversion, could persist.

Ms Yellen’s comments pushed US markets down and
both the S&P 500 and Dow Jones Industrial Average
dropped as investors weighed up the likelihood of
a rate rise. The S&P 500 ended yesterday’s trading
session down 0.22 per cent at 2,126.06, while the
Dow Jones closed at 18,232.02, a drop of 0.29 per
cent.

The dollar was up against the pound and the euro,
putting the greenback on course for its biggest
weekly gain against the euro in more than three
years.

Source - The Times(UK)



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