US Yellen makes case for a December rate hike

In her speech to the Economic Club of Washington this lunch time, Fed Chair Janet Yellen was quite explicit in making the case for a first interest rate hike at the upcoming FOMC meeting, which ends on 16th December.

According to October's FOMC statement, Fed officials believe "it will be appropriate to raise the target range for the federal funds rate when [they have] seen some further improvement in the labor market and [are] reasonably confident that inflation will move back to its 2% objective over the medium term."

 According to Yellen today, she currently judges that "US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent". In short, she believes the conditions for a rate hike have been met.

Declaration came with the usual caveats: Its data dependent and a really bad November payrolls figure or some other negative shock (perhaps another dip in the stock market like we saw in August) could yet persuade the Fed to hold fire.

"We don't expect any major disappointment over the next two weeks, so we have to assume that a rate hike is coming", says Capital Economics in a research note.

 Beyond the first rate hike, Yellen stressed once again that subsequent rate hikes are likely to be very gradual, in part because the neutral real interest rate might now be as low as zero. But frankly that estimate is 90% guesswork.

"We suspect that a stronger than expected rise in inflation next year will force the Fed to raise interest rates more aggressively, with the fed funds target range above 1.5% by end-2016',added Capital Economics.