United States Monetary Policy

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United States: Yellen offers little clarity at Jackson Hole, but Fed minutes show growing support for earlier rate hike

August 27, 2014

Top central bankers from around the world gathered in Jackson Hole on 21–23 August for an annual economic conference that is sponsored by the Federal Reserve Bank of Kansas City. Janet Yellen, Chair of the Fed, delivered a keynote speech which some had expected would provide clarity on when the Fed might start raising interest rates. However, Yellen essentially followed the same tone of previous messages. She acknowledged that the economy has made considerable progress since the depths of the recession and pointed out significant gains in the labor market, but continued to emphasize that the economy is far from reaching its potential and that there is still slack in the labor market. Moreover, Yellen expressed concern over the growing number of part-time workers seeking full-time employment, as well as stagnated wage growth.

Meanwhile, minutes of the Federal Open Markets Committee meeting that took place on 29–30 July confirmed that there is intense debate within the Fed over when and how interest rates should be raised. In that meeting, Philadelphia Federal Reserve President Charles Plosser was the only member of the FOMC to show dissent regarding the decision to keep rates low for an extended period of time. He argued that the Fed’s open-ended timeline does not reflect the economic progress that is being made. However, the minutes of the meeting, which were released on 20 August, show that the tide may be turning as support is growing for an earlier-than-anticipated rate hike.

The minutes show that meeting participants, “generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.” Concern among some members regarding the Fed’s vague guidance on how economic achievements will influence policy decisions and the risk of overshooting goals led some of them to even call for a, “relatively prompt move toward reducing policy accommodation.”

The general consensus before the minutes were released was that there would be a rate hike sometime during the third quarter of next year, although some analysts are now expecting a hike by the end of June 2015 or even as early as March. The market will be on the lookout for any signals about the timing of a potential rate hike at the next FOMC meeting, which is scheduled for September 16–17. According to Joseph Song, U.S. economist at Nomura Securities:

“Although we expect substantial changes to the FOMC’s forward guidance, we do not think that the FOMC will want to send a signal that a change in interest rates is, in any sense, imminent. In this context, we still think that the most likely timing for the first interest rate hike is next June. However, the combination of the July FOMC minutes and Chair Yellen’s speech has clearly shifted the risk around our call forward.”

FocusEconomics Consensus Forecast panelists expect the Fed to keep interest rates unchanged in 2014. Next year, the panel sees the federal funds rate averaging 0.84%.


Author:, Economist

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USA Monetary Policy July 2014 2

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0% and 0.25%.
Source: Federal Reserve


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