The U.S. dollar rose to the highest level in three weeks on Monday against the Japanese yen, building on Friday’s 2 week high following Fed Chair Janet Yellen’s remarks during her Jackson Hole keynote speech that acknowledged U.S. economic activity continues to expand, led by solid growth in household spending, and the case for an increase in the federal funds rate has strengthened in recent months.
Yellen said that U.S. job gains have averaged 190,000 per month over the past three months but pointed out that inflation continues to run below the Fed’s 2 percent inflation target, reflecting in part the transitory effects of earlier declines in energy and import prices, and business investment remains soft.
Yellen admitted that weaker foreign demand and the appreciation of the dollar since 2014 continue to restrain exports.
Yellen explained that Committee members at the U.S. Federal Reserve expect “moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years.”
Yellen said that Committee members anticipate “gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”
Yellen acknowledged that the economic outlook is uncertain and so monetary policy is not on a preset course.
She emphasized that the ability of Fed Committee members to predict how the federal funds will evolve over time is “limited” because monetary policy will need to respond to whatever disturbances are impacting the economy.
During the Fed’s next policy meeting in September, Committee members will be updating their projections with the federal funds, the Fed’s benchmark interest rate.
At the Fed’s December policy meeting, Committee members voted to raise the federal funds by 0.25 basis point, marking the first interest rate hike since June 2006.
During the Fed’s December policy meeting, there were also 4 rate hikes projected for 2016 but so far none of them have materialized.
Yellen said that the Fed’s projections show the federal funds rate settling at about 3 percent in the longer run and pointed out that the federal funds rate averaged more than 7 percent between 1965 and 2000.
“Thus, we expect to have less scope for interest rate cuts than we have had historically” Yellen admitted.
Fed Vice Chair Stanley Fischer Weighs In About Likelihood Of Rate Hike
Speaking to CNBC’s senior economics reporter Steve Liesman following Yellen’s Jackson Hole speech, Fed Vice Chair Stanley Fischer, who is known for hawkish policy stances, responded to pointed questions about whether investors should be on the edge of their seats for a rate hike in September and possibly a second one in 2016.
“I think what the chair said today was consistent with answering yes to both of your questions but these are not things we know until we see the data” Fischer said.
Fed Vice Chair Fischer explained that it all depends on what kind of data they get and how strong the data is.
The Week Ahead
Fed Vice Chair Stanley Fischer and his fellow Fed Committee members will be receiving some important U.S. inflation and jobs data this week that will help to determine whether economic conditions are strong enough to support an interest rate hike in September.
On Monday, the Fed’s preferred inflation gauge, the Core PCE Index, will be reported for July. Economists from briefing.com have a consensus estimate of a 0.1 percent increase with Core PCE Prices in July.
Consumer confidence for August is released the following day on Tuesday alongside the Case Shiller 20 city index for June.
On Wednesday private payroll processor ADP will report private sector job gains for August. Chicago PMI for August also comes into view on Wednesday in addition to pending home sales for July.
The ISM index for August is due on Thursday. Economists from briefing.com have a consensus estimate of 52.2 in August, which is slightly lower than the 52.6 in July.
Auto and truck sales for August will also be announced on Thursday.
On Friday the closely watched U.S. non-farm payroll report for August will be reported from the U.S. Bureau of Labor Statistics.
Economists from briefing.com have a consensus estimate of 180,000 jobs created in August which comes after July’s non-farm payroll gain of 255,000.
The U.S. unemployment rate is expected to drop slightly to 4.8 percent from 4.9 percent.
Some of the other economic data reported on Friday includes factory orders for July and the trade balance for July.