Economy Watch: Fed Chair Says Rates Will Go Up (Eventually)

A string of upbeat US data and increasingly positive comments from Fed boss Janet Yellen have fuelled speculation of an interest rate rise in the world's top economy

"They said they based their new forecasts after surprisingly strong figures for US retail sales and consumer prices last month and more hawkish rhetoric from Fed Chair Janet Yellen and other central bank officials".

Federal Reserve Chair Janet Yellen testifies before the House Finance Committee in the Rayburn House Office Building November 4, 2015 in Washington, DC.

The greenback was initially under pressure following the resignation of President Donald Trump's national security adviser, Michael Flynn, who quit over revelations he had discussed US sanctions against Moscow with the Russian ambassador to the United States before Trump took office. "When we have confidence that the economy is on a solid course and the federal funds rate has reached levels where we have some ability to address weakness by cutting it".

However, no recession in that period has been as severe.

Yet of more importance will be to see if economic data backs up the case for monetary tightening.

Yellen said on Tuesday that the Fed will likely raise short-term interest rates at its upcoming meetings to avoid being forced into a steeper hike at a later date.

"We are committed to shrinking our balance sheet but consider it best from the standpoint of sustaining the recovery to do that in a gradual and orderly way", she said.

Other analysts think the Fed will wait longer, as it takes the measure of Mr. Trump's fiscal program, and its chances of implementation by a sometimes balky Congress. Ian Shepherdson, chief economist at Pantheon Macroeconomics, expects the next hike to come no earlier than May.

"There are limits on what the Fed can accomplish".

Neil Wilson, senior market analyst at ETX Capital, said: "Bang on cue, and no doubt with an eye to outshine Janet Yellen, Donald Trump offered a tantalising foretaste of planned tax reforms that sent the Dow soaring to new record highs".

That dynamic is creating many "dissatisfied Americans".

Looking ahead to later in the day, "focus will be very much on the USA as we await Janet Yellen's second day of testimony", said Erlam. Because the Obama administration has yet to appoint a vice chairman for supervision at the Federal Reserve - as madated by the Dodd-Frank Law - Yellen is assuming the semi-annual duty for reporting to the committee on the Fed's "supervision and regulation of the financial system". Or would she have a neutral view on things?

"We participate regularly as part of our established responsibilities", she said, denying that constitutes a negotiation.

He said the structures of these organisations were "secretive" and must be "re-evaluated".

The economic stimulus led by Trump in the U.S. has also been the reason of dollar downfall in the recent days as the Asian shares and United States equity markets had record highs on Tuesday.

In her testimony, however, she agreed on the need to reduce the regulatory burden on banks, especially small ones.

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