Fed's Yellen faces battle in 2016 after getting all clear for December hike

Fri Dec 4, 2015 9:41pm EST
 
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By Jason Lange, Lindsay Dunsmuir and Jonathan Spicer

WASHINGTON/PHILADELPHIA (Reuters) - Federal Reserve Chair Janet Yellen has the evidence of U.S. labor market health she wanted in order to raise benchmark interest rates for the first time in a decade this month, but she may have a tougher time selling further hikes.

Yellen's arguments against potential dissenters at the Dec. 15-16 Fed policy meeting were strengthened by Labor Department data on Friday that showed employers hired 211,000 people in November while even greater numbers joined the workforce.

Federal funds futures contracts imply a 79-percent chance that the Fed will end seven years of near-zero interest rates at its December meeting and about even odds of a second rate rise by March.

Beyond that the outlook is more mixed. Interest rate futures maturing in the second half of next year are rising slightly, showing traders are wagering the Fed will manage no more than two further hikes before the end of next year.

The differences among Fed policy makers were on display at a Philadelphia Federal Reserve conference on Friday where Narayana Kocherlakota, in his last speech as president of the Minneapolis Fed, gave a sharp critique of a central bank that he said was too anxious to begin raising rates and thus would fail to create perhaps millions of jobs in a timely manner.

James Bullard, the more hawkish head of the St. Louis Fed, followed that presentation with one that argued it is time to raise rates and to begin shrinking the central bank's $4.5 trillion balance sheet which was bulked up in recent years to boost the economy.

"You have an open debate between doves and hawks as to what the pace of increases should look like," said Art Hogan, chief market strategist at Wunderlich Securities in New York, referring to the divisions within the Fed over readiness to tighten monetary policy.

The Fed has appeared gun shy on tightening policy twice already this year, in June and September. Its key policy rate has been 0-0.25 percent since the depths of the financial crisis in late 2008.   Continued...

 
U.S. Federal Reserve Chair Janet Yellen addresses the Economic Club of Washington in Washington December 2, 2015. REUTERS/Joshua Roberts