On Friday Fed Chair Janet Yellen said in a speech that it will be appropriate to raise interest rates at some point this year and take gradual steps to normalize monetary policy as signs in the economy and labor market point to recovery.
Interest rates have not risen since 2006 and the federal funds rate have remained at record lows, slightly above zero to 1/4 percent, since December 2008 during the depths of the global recession when the U.S. central bank acted decisively and took highly accommodative actions with a deep interest rate cut combined with three later rounds of quantitative easing that are now in the rear view mirror.
Yellen told her audience in Providence, Rhode on Friday that delaying action to tighten monetary policy until employment and inflation are back to the Fed’s objectives would carry the risk of overheating the economy.
“For this reason, 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 normalizing monetary policy” Yellen said.
Yellen pointed out that raising interest rates will be a gradual process and continued improvement in labor market conditions and inflation are needed before the U.S. central bank is ready to take this step.
A rising U.S. dollar in the first three months of 2015 lowered the prices of imported goods and kept inflation from rising combined with declining oil prices and slower economic growth, likely due to the cold winter weather.
But as oil prices climb higher and the U.S. dollar retreats from its March highs, the expectations for inflation to move closer to its 2 percent target become stronger and Yellen pointed this out in her speech on Friday.
“Inflation has been held down by the continued economic weakness during the slow recovery and, more recently, by lower prices of imported goods as well as the fall in oil prices. With oil prices no longer declining, and with the public’s expectations of future inflation apparently stable, my colleagues on the Federal Open Market Committee (FOMC) and I believe that consumer price inflation will move up to 2 percent as the economy strengthens further and as other temporary factors weighing on inflation recede” Yellen said.
On Friday the latest inflation numbers from the Labor Department for April with consumer price index, which is not the Federal Reserve’s preferred inflation index for basing monetary policy, showed that inflation rose modestly at 0.1 percent after increasing 0.2 percent in March.
Core CPI which doesn’t include food and energy costs, increased 0.3 percent, the largest increase since January 2013, and surpassed 0.2 percent in March.
The week will see a shortened trading week in the U.S. due to a holiday on Monday- Memorial Day.
But there is plenty of U.S. economic data for traders to absorb this coming week, including durable orders on Tuesday, followed by new home sales for April and consumer confidence for May.
On Thursday pending home sales for April will be reported along with jobless claims.
On Friday the 2015 first quarter GDP (2nd estimate) will be reported. Briefing.com forecasts a -1.0 percent GDP first quarter result for its 2nd estimate.
The 2015 first quarter GDP (1st estimate) showed economic growth of only 0.2 percent.
Tuesday – Durable Orders (April), Durable Goods (ex-transport) for April, Case Shiller (20 city index) for March, FHFA Housing Price Index (March), New Home Sales (April), Consumer Confidence (May)
Wednesday- MBA Mortgage Index
Thursday- Initial Jobless Claims, Continuing Jobless Claims, Pending Home Sales (April), Natural Gas Inventories (5/23/15), Crude Inventories (5/23/15)
Friday- GDP (2nd estimate) for 1st quarter, GDP deflator, Chicago PMI (May), Michigan Sentiment