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Janet Yellen hints at March rate hike — and more to come

Federal Reserve chair Janet Yellen gave investors a clear sign on Friday that the Fed is likely to raise its benchmark interest rate later this month — and more hikes to follow later this year.

Fed chair's speech will be scrutinized in wake of other members musing about hiking soon

Janet Yellen's comments made it clear that rate hikes are coming in the U.S. and soon. (Andrew Harrer/Bloomberg)

Federal Reserve chair Janet Yellen gave investors a pretty clear sign on Friday that the U.S. central bank is likely to raise its benchmark interest rate later this month — and more hikes to follow later this year.

In a speech on the central bank's economic outlook at the Executives' Club of Chicago on Friday, the Fed chair told the gathered audience that a slight increase to the federal funds rate would be "appropriate" when the bank next meets for a two-day policy meeting on March 14 and 15.

"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said.

In Fed terms, that's as close as it gets to a bright, flashing, green light.

"Speaking in Chicago, Janet Yellen confirmed what currency markets already suspected: the Federal Reserve is preparing to raise rates at its next meeting," foreign exchange strategist Karl Schamotta at Cambridge Global Payments said.

Barring something untoward in the next 10 days, it seems clear the U.S. is getting set to hike rates at least a little, Schamotta said.

And more interest rate increases could follow, Yellen said: "We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect."

Yellen noted that the U.S. economy is chugging along, cranking out an average of about 180,000 jobs a month at the moment. That's well above the range of between 75,000 and 125,000 that should be expected just from growth in the labour force — and another sign the world's largest economy is heating up and finally ready to stand on its own two feet.

"This comes after a week in which a series of data releases acted to confirm the economy's underlying momentum, while voting committee members launched a concerted effort to push March rate hike expectations higher," Schamotta said, noting that Yellen is only the most recent Fed official to muse opening about rate hikes in recent days.

'I do think it is on the table'

On Tuesday, William Dudley, president of the Fed's New York regional bank and a close Yellen ally, said the case for raising rates had "become a lot more compelling."

On Wednesday, Lael Brainard, a Fed board member and previously a leading advocate for delaying rate increases, said she thought the case for another hike was strengthening.

"Assuming continued progress, it will likely be appropriate soon to remove additional accommodation" by raising rates, Brainard said in a speech at Harvard University.

And Jerome Powell, another board member, was even more specific, saying in a Thursday CNBC interview, "I think the case for a rate increase in March has come together, and I do think it is on the table for discussion."

Earlier in the week, Robert Kaplan, head of the Dallas Fed, said he thought the central bank would likely raise rates "in the near future."

Last week, economists surveyed by Bloomberg saw a one-in-three chance that the Fed would hike its benchmark interest rate on March 15.

After Yellen's speech came out on Friday afternoon, however, the odds had risen to 75 per cent.

"There were no shades of grey in Fed officials' comments this week as they sent a loud, co-ordinated message that a rate hike is coming soon," BMO economist Doug Porter said.

In hindsight, the Fed has been too slow to start raising rates once inflation starts heating up, and then ends up raising them too much, Scotiabank economist Derek Holt wrote in a note on Friday. That means Yellen and her compatriots have a delicate balancing act to pull off, he said.

"I have a much easier job than the policy makers who are in the hot seat," Holt said. "Their decisions will be judged by history with lasting consequences. There are risks to prematurely tightening policy and going too fast, and there are risks to waiting too long or going too slow."

With files from The Associated Press

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