Interest rate hike likely this year, Yellen reiterates

An increase in short-term interest rates is likely at some point this year, the chair of the Federal Reserve bank Janet Yellen was set to tell congressmen on Wednesday afternoon, according to prepared remarks released before her testimony.

Yellen appeared to in effect reiterate the stance she set out on 10 July in a speech in Cleveland, with traders expected to tune into the question and answer session scheduled for after her speech.

In the text of the speech Yellen said the prospects for “further improvement” in the US labour market and economy more broadly were favourable.

However, some labour market gauges indicate “there is still some slack in labour markets”.

“Although there are tentative signs that wage growth has picked up, it continues to be relatively subdued, consistent with other indications of slack,” she added.

In the FOMC's judgment, she went on to explain, labour market conditions “had improved substantially” but were not yet consistent with maximum employment.

As regards prices, the policy-maker said inflation had continued to run below the central bank's longer-run objective, but it believed "transitory factors had played "a major role".

"We continue to anticipate that it will be appropriate to raise the target range for the federal funds rate when the Committee has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term," she concluded.

Yellen's message was met with a lukewarm reception, with analysts indicating that the Fed chairwoman's testimony provided little new insight into her latest thinking.

"Regardless of her current assessment of economic conditions, what will determine the timing of the first rate hike and the pace of tightening after that is economic conditions, particularly the pace of wage growth and core inflation," said Paul Ashworth, chief US economist at Capital Economics.

"We still believe that a pick-up in both will prompt the Fed into a much more aggressive series of rate hikes next year."