Yellen indicates Fed rate hike by year-end

The end of 2015 could finally see a rate hike from the US Federal Reserve, almost nine years after it signalled a regime of low rates in order to help global growth. The Fed's chair Janet Yellen on Thursday 24 September, said she was confident of a US recovery amid a sluggish global economy and reiterated plans to withdraw the central bank's extraordinary stimulus by year-end as long as inflation was stable and employment levels remained strong.

In a speech at the University of Massachusetts-Amherst, Yellen said, "It will be appropriate to raise the target range of the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace." She emphasised the gradual pace, saying an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push economies into recession. However, she cautioned that Fed strategy would have to change if there were economic surprises.

According to Yellen, the recent inflationary weakness was transitory and much of it was due to special factors such as a strong dollar and low oil prices, which are likely to fade, allowing US inflation to rise to the 2% target set by the Fed over the next few years. The Fed chair also cautioned that inflation may rise more slowly or rapidly than anticipated. "Should such a development occur, we would need to adjust the stance of policy in response," she said.

Two crucial meetings of the Federal Open Market Committee (FOMC) are scheduled for 27-28 October and 15-16 December. Most foresee a rate hike will come in December, given October is too early.

In its latest policy review meet on 17 September where the Fed held rates, Yellen attributed the decision to a volatile global economy spearheaded by the China slump. The message sent out seemed hawkish to many investors who deemed a rate hike to be distant, probably until March 2016. To assuage these fears Yellen said it was best not to delay "too long" and adjust policy in the light of incoming data.

Yellen fumbled over the last part of her speech and said she felt light-headed and dehydrated. She received immediate medical attention, and central bank officials later said she was fine and back on schedule.