Wall St falls after Fischer, Yellen comments

Andrew Cummings
September 1, 2016

Prices were volatile, with the metal tracking moves in the USA dollar as traders assessed comments from Federal Reserve Chairman Janet Yellen and Vice Chair Stanley Fischer, which hinted at the potential for an interest-rate increase as early as next month.

"Eight months on and we're still awaiting the first of these and if it does come, even a second this year looks extremely unlikely".

Yellen said she expects "moderate growth" in GDP and further tightening in the labor market over the next few years.

Hunter pointed to a government report Friday that the economy, as measured by the gross domestic product, grew at an anemic 1.1% annual rate last quarter as evidence that the Fed likely wants to see stronger growth. Low rates are a boon for gold, which becomes more competitive against interest-bearing assets.

Two close Yellen allies - William Dudley, president of the Federal Reserve Bank of NY, and Stanley Fischer, the Fed's vice chairman - suggested in the past week that a strengthening economy would soon warrant a resumption of the rate hikes the Fed began in December. The dollar fell to 100.45 yen from 100.58 yen the previous day.

U.S. Treasury prices slumped as investors evaluated whether the Fed is likely to raise rates in September.

The S&P 500 rose as much as 0.7 percent and declined by as much as 0.6 percent during the session.

Gold is highly sensitive to rising USA interest rates, which increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. She acknowledged that inflation continues lag the Fed's 2% target, a state of affairs she blamed "in part on the transitory effects" of lower energy and import prices.

"As ever, the economic outlook is uncertain, and so monetary policy is not on a preset course", Yellen said.

Some analysts have suggested the Fed will have less flexibility to fight future recessions because there will be less room to cut rates.

"Yellen's highly anticipated remarks at Jackson Hole had a hawkish tilt. although with the usual caveats that the timing will be based on how the data unfold", said Avery Shenfeld, chief economist for CIBC Capital Markets.

Because slower growth means future USA interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates. She said the Fed still planned to wind down its massive balance sheet, but that such an effort would take time.

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