Along with the speech of the Federal Reserve Chair, Lacker from FOMC stated that interest rates should rise more actively than expected by the markets. The dollar‘s value increased even before Yellen’s press conference. According to his estimate, the US GDP will be 2% in 2017, and inflation will reach the target level of 2%. Lacker noted that the regulator should raise interest rates earlier rather than later.
Yellen’s Statements Were Extremely Unexpected
The official mentioned the high degree of uncertainty regarding the future tax and budget policy of Trump. An important statement was that Lacker sees compelling reasons for raising interest rates in March. Meanwhile, an alternative member of FOMC mentioned the need to reduce the Fed’s balance sheet.
The EUR/USD pair lost more than 0.5% following the speech of the Federal Reserve Chair, Janet Yellen. The head of the regulator stated that the FOMC will consider another interest rate increase at upcoming meetings. Tax and budget measures of the new administration may affect the country’s economic activity prospects, but it is too early to talk about a specific economic effect. These measures may also impact monetary policy.
The overall assessment of the US economy was favorable. Inflation is moving towards the 2% mark, the labor market continues to strengthen, and wages are growing at higher rates.
Yellen called the long-term goal of the Fed to reduce the balance sheet. Future discussions will cover reinvestment issues. It may refer to the completion of this program. According to the Taylor Rule, the Fed’s interest rate should be at 3.5-4.0%, said the head of the Federal Reserve.
Experts noted that Yellen’s rhetoric indicates that a rate hike in March seems likely. The futures market increased the probability of a rate hike in March from 13.3% to 17.7%.
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About the US Dollar Exchange Rate
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FAQ
Why did the EUR/USD pair drop after Yellen’s speech?
The EUR/USD pair dropped due to expectations of higher interest rates in the US, which made the dollar stronger.
What did Yellen say about the US economy?
Yellen mentioned that the US economy is performing well, with inflation approaching the 2% target and the labor market strengthening.
Is a rate hike in March likely?
Yes, experts believe a rate hike in March is likely based on Yellen’s statements and market reactions.
