Fed in no hurry

Fed Chairman shifting the focus more on structural problems Fed Chairman Yellen adopted a very cautious tone again during yesterday’s speech to the US Congress over whether to tighten the monetary reins further. Signs of economic improvement can be noted in a number of sectors but these are being accompanied by developments that give cause for concern. In particular the lack of dynamism on the US labour market needs to be closely monitored. All in all, however, Ms. Yellen expects the current bout of weakness to be temporary.
The Fed Chairman also stressed the need for a slow approach in the new cycle of interest rate increases due to the stiff headwind facing economic development. A comparison of the various speeches held by Ms. Yellen reveals a slight change in the monetary accent within the Fed in recent months. The central bank is evidently shifting the focus away from cyclical factors as the main cause of the weak economic development and now placing the spotlight more on the numerous structural problems. In this context the Fed makes ample reference to the low productivity growth and weak investment activity. Multiple global risks were also mentioned again in the latest assessment of economic development. In this context Yellen mentions the transformation of the Chinese industry into a less export-dependent economy. All in all, she considers the global economy to be highly susceptible to upheavals.
How will things develop with regard to monetary policy?
No concrete references were made to the way in which the interest rate cycle is progressing. Yellen reiterated that monetary policy will remain expansionary for quite some time, with further interest rate increases only being made gradually. Yet the Fed would appear to be actively searching for arguments to oppose this. Nonetheless we still see a possibility that key interest rates could be raised again in July if the British vote in favour of remaining in the EU and the June Labor Market Report has improved. Otherwise the next time slot for a fresh round of rate increases would, according to our estimate, be towards year-end.

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