Federal Reserve boss Janet Yellen hints at spring rate hike

Markets tumble as Janet Yellen changes the rules on interest rates guidance

New York

The new Federal Reserve chairman, Janet Yellen, sent Wall Street sliding last night in her first public outing since taking on the role as she said interest rates could start to rise about six months after quantitative easing comes to an end.

Her comments undid much of the Federal Open Markets Committee's earlier dovish statement that said it would consider a far broader range of economic indicators than just unemployment before hiking borrowing costs. Namely, the committee will consider inflation expectations among other factors.

Asked when the rate-setting committee would start raising rates after QE, Ms Yellen said: "So the language that we use in the statement is 'considerable period'. This is the kind of term it's hard to define but probably means something on the order of around six months, or that type of thing."

On those words, the Dow Jones Industrial Average fell sharply, ending the session down 114 points at 16,222.

Analysts said that suggested, at the current pace of tapering out QE, rates would start to rise in about April 2015.

However, her overall comments were far from those of an out-and-out hawk.

She added: "What the statement is saying is it depends what conditions are like … The new guidance does not indicate any change in the policy intentions of the FOMC, but instead reflects changes in the conditions we face … progress in the labour market has been more rapid than we anticipated … Inflation matters here too. If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 per cent objective, that is a very good reason to hold the funds rate at its present range for longer."

The rapid improvement in the jobless rate in the US has wrongfooted the Fed just as Britain's has caught out the Bank of England and its Governor, Mark Carney, who had to rewrite his own guidance which had been based around a 7 per cent unemployment threshold. Mr Carney set that target last August when unemployment was at 7.8 per cent. It has since plummeted to 7.2 per cent, where figures yesterday showed it had held for a second consecutive month.

Speaking after the Yellen conference, Brian Jacobson, chief portfolio strategist at Wells Fargo Funds Management, said: "The forward guidance is mildly hawkish. Yellen is no dove. She's a pragmatist."

Once rates do eventually start to rise, Fed officials see slightly sharper increases than they did in December, with rates ending 2015 at 1 per cent and ending 2016 at 2.25 per cent, according to forecasts by Fed policymakers. In December, Fed officials expected short-term rates to be just 1.75 per cent by the end of 2016.

Of the Fed's 16 policymakers, only one believes it will be appropriate to raise rates this year, according to Reuters, while 13 expect a first rate hike in 2015, and two others see the first rate rise happening in 2016.

On Wednesday, the Fed said the US economic recovery was strong enough for the central bank to continue reducing its bond-buying stimulus measures by $10bn (£6bn) a month.

These monthly purchases of mortgage-backed and Treasury securities have boosted markets and helped to keep interest rates low.

Beginning in April, the Fed will add to its holdings of agency mortgage-backed securities at a pace of $25bn a month rather than $30bn a month, and will add to its holdings of longer-term Treasury securities at a pace of $30bn a month rather than $35bn a month.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk