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US likely to hike interest this year

2015-05-22 (Friday) Janet Yellen said: "If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalising monetary policy.”  Subsequent rate rises were likely to be “gradual”, Ms Yellen added, given the headwinds that would continue to hold back growth. It would be “several years” before the federal funds rate was back to its normal, long-term level.

With the Federal Reserve on track to raise interest rates this year and major indexes near records, the market could get a bit choppier in coming weeks.

Yellen's comments kept the likelihood of a September rate increase high. Market indicators put the first increase closer to the end of the year.

Analysts expect the Fed to move slowly and communicate its intentions often to avoid a "taper tantrum" of the variety caused by former Fed Chairman Ben Bernanke in mid-2013.

According to Bespoke Investment Group in Harrison, New York, in the three months after the Fed raises rates following a year of keeping them steady, the S&P 500 falls an average of 2.27 percent.

The market reaction this time could be amplified given valuation concerns. The S&P's forward price-to-earnings ratio is 17.5, well above the long-term average of 14.8, Thomson Reuters data showed.

Reference:

  1. Financial Times, Sam Fleming, 2015-05-22, "Janet Yellen Expects US Economy to Strengthen"
  2. Reuters, 2015-05-22, "Yellen Tone Suggests Choppiness For Market Ahead"