Janet Yellen is set to appear before a hearing at an oversight committee in the House of Representatives today, and it seems that the chair of the US central bank will repeat her intention to raise interest rates by the end of 2015.
In a written statement delivered to the committee before her appearance to answer questions later on today, Yellen said that as the US economy continues to improve the data will likely “make it appropriate at some point this year to raise the federal funds rate.” That means the economy will diverge from that of Europe and Japan, and could mean ructions on the markets.
Janet Yellen sticks to rate rise
The Federal Reserve had been expected to bring a rate rise to bear on US market in September, but less than positive data from outside the US has made that much more unlikely. Yellen highlighted those issues in this morning’s statement.
“Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions” in her view. Labor market conditions are still not at full employment, meaning that the central bank feels it has some time before its loose policy results in an inflation issue.
Diverging from the monetary policy in the rest of the world will be a big move for the Fed as the bank tries to pave a smooth path forward for the US economy. There are numerous effects that a divergent monetary policy can have, and many of them have already been seen on the back of forecasts that the Fed was set to rise rates.
US Firms deal with rate rise
At the beginning of 2015 US firms dealt with a massive rise in the value of the US dollar against the rest of the world’s currencies. When interest rates in a country rise, demand for that country’s money tends to go up because there is a higher return on capital.
That raises the value of the currency with higher interest rates relative to those with lower rates. “Currency headwinds” is a phrase those with stocks are going to see more and more over the coming weeks. As with a bad winter, lower FX values are a perfect reason for less than strong financial results.
Almost every firm that operates around the globe is going to be hit by the strength of the US currency, but as traders don’t expect a rate rise in Europe for years, it may stay that way for quite a long time.
Earnings this time around are still going to be hit by the same problem they were in the first quarter of the year. It’s not clear when the firm’s losing out stop mentioning it as a reason for their poor performance, but if Yellen goes forward with her plans to diverge the FX situation is likely to continue for some time.