February 24, 2015

Yellen sheds light on interest rate outlook

Federal Reserve Chair Janet Yellen testified before lawmakers on Tuesday, Feb. 24, providing greater clarity on the central bank's timeline for boosting benchmark interest rates. 

Up until this most recent meeting before the Senate Banking Committee, the Fed had repeatedly pledged to keep key rates low as long as needed and later affirmed that it would remain "patient" when considering increases. 

Yellen changes tone
However, Yellen's latest speech had a different tone, as she spoke to when and how these key rates will move higher, according to The Wall Street Journal. In addition, she commented on the state of the economy. 

Her statements did not point to the central bank increasing its benchmark rates at its March or April meetings, The Wall Street Journal reported. However, the financial institution might make this shift mid-year, according to the statements of numerous Fed officials, although the outcome of the situation is uncertain. 

Key indicators
Yellen emphasized the importance of certain indicators when speaking before lawmakers, according to The New York Times. She noted that since the release of the July 2014 Monetary Policy Report, the nation's labor market has strengthened, coming closer to the Federal Open Market Committee's goal of maximum employment. 

"However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective," said Yellen. "As always, the Federal Reserve remains committed to employing its tools to best promote the attainment of its objectives of maximum employment and price stability." 

She elaborated, adding that the state of unemployment has been strengthening in many ways, The Wall Street Journal reported. In addition, both production and spending have been rising at a "solid rate," and this improvement should be robust enough to help reduce unemployment. 

Interest rate outlook
Should business conditions continue to strengthen, the Federal Open Market Committee will start thinking about increasing the target for the federal funds rate. Yellen stated that if this minimum threshold was reached, policy makers would begin considering the potential rate hike on a meeting-by-meeting basis. 

In addition, she removed the word "patient" from the Fed's forward guidance, but emphasized that market observers should not take this alteration to mean the central bank will opt to increase its benchmark rates during the next few meetings. 

After this latest guidance from the Fed, financial institutions must consider the potential implications for loan portfolios. While their prices are high right now, these portfolios will depreciate as rates climb. 

Banks looking at such transactions might benefit from speaking with Garnet Capital Advisors, a loan sale advisory firm with deep experience spanning many types of debt.