3 Rate Hike Hints from Fed Officials’ Speeches

Some dollar bulls still seem to be moping after the Fed’s decision to keep interest rates on hold in this month’s policy statement, but many are still hopeful that the liftoff will take place before the end of the year, keeping the Greenback supported against its forex rivals. Sure the Fed can be as transparent as a brick wall sometimes, but the FOMC officials’ speeches this week did contain some clues on when they might announce a rate hike.

FOMC member Williams: Gradually raising rates as next appropriate step

If you’re wondering how the U.S. dollar managed to start the week on a positive note even after the FOMC statement turned out to be a downer, then you should know that FOMC member John William’s speech titled “China, Rates, and the Outlook: May the (Economic) Force Be With You” last Saturday might have had something to do with it. A Star Wars fan? I like him already!

Williams admitted that the September Fed decision was actually a close call, given the conflicting economic signals they’ve been getting. He highlighted the improvements in employment and overall economic growth but shared that inflation has failed to impress, most notably due to the oil price slump and the dollar’s forex strength. He also went in detail about his assessment of China but downplayed its potential threat on the U.S. economy.

“[G]iven the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” he concluded. “Of course, that view is not immutable and will respond to economic developments over time.”

FOMC member Lockhart: More normal interest rate environment later this year

Next up was Atlanta Fed President Dennis Lockhart (Muggle brother of Hogwarts Defense Against the Dark Arts professor Gilderoy Lockhart?) who had at least three speaking engagements this week. Sure is a busy man, isn’t he? Well, he does rehash most of his remarks every now and then but his consistent hawkish tone was enough to remind forex participants that Fed interest rates could Wingardium Leviosa their way up to 0.50% later this year.

Lockhart reiterated that the U.S. economy is performing solidly even with all the financial market volatility and uncertainty. “At this point, my summary assessment is that the sources of uncertainty that fueled financial market volatility represent a modest risk to our economy, but a risk factor nonetheless,” he pointed out. Just like Williams, he acknowledged that the labor market is doing mighty fine but cautioned that inflationary pressures remain subdued. He also zoomed in on wage growth, citing that some degree of slack is present but that upward pressure is evident.

“As things settle down, I will be ready for the first policy move on the path to a more normal interest-rate environment. I am confident the much-used phrase ‘later this year’ is still operative,” Lockhart emphasized. “Once normalization is under way, I anticipate a gradual pace of rate increases.”

Fed Chairperson Yellen: Initial rate hike likely this year

Last but most certainly not least is Fed Chairperson Janet Yellen herself who had a much more confident tone in her testimony yesterday. “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” she said.

Of course Yellen followed these optimistic remarks with her usual words of caution, saying that Fed officials are unsure how long the headwinds to the domestic economy might last and that any negative surprises could still lead them to drop their tightening bias. She also pointed out that the U.S. economy is moving closer to full employment but that inflation has continued to run below their long-run target.

USD Index 1-hour Chart

USD Index 1-hour Chart

A quick look at the U.S. dollar index reveals that the currency has managed to erase its post-FOMC losses throughout this week and go for some gains against its forex rivals, mostly due to these positive remarks from FOMC members. Strong data from the U.S. and more hawkish comments from other Fed officials could allow the Greenback to sustain its climb leading up to the next Fed decision.

When do you think the Fed will hike interest rates? Do you think they’ll announce a liftoff in October or wait until December? Cast your votes in our poll below!