Yellen Speech Fuels September Rate Hike Speculation

To many, Federal Reserve Chair Janet Yellen’s speech in Wyoming on Friday fueled further speculation that a rate hike from the Fed is on the horizon for September.

The Fed has kept the short-term interest rates at their current low level (0.25 percent to 0.5o percent) since the historic rate hike in December. In the eight months since then, Treasury yields have fallen to record lows, and mortgage rates have tumbled right along with them. In the weekly Freddie Mac mortgage rate survey, the average 30-year fixed rate was 3.43 percent, just 12 basis points above its all-time low, and it has been below 3.5 percent for nine straight weeks.

Even with the second estimate for Q2 GDP growth coming in at a disappointing 1.1 percent on Friday (down from 1.2 percent in the advance Q2 estimate), Yellen hinted that a rate hike may happen when the Federal Open Market Committee, the policymaking arm of the Fed, convenes next on September 20-21. The last two jobs reports from the Bureau of Labor Statistics have been solid, and all industry eyes will be watching when the BLS releases the August jobs report on Friday, September 2.

“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said on Friday. “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.”

While Yellen was not specific about the timing of the rate hike, at least a few analysts interpreted this to mean that a rate hike in September is looking more and more likely.

“Yellen’s comments were in line with those of other Fed officials who see the economy as drawing nearer to the point that would warrant a rate hike,” said Curt Long, Chief Economist of the National Association of Federal Credit Unions. “The past two jobs reports have been especially robust, and they along with the minimal immediate impact from Brexit have seemed to allay concerns among a number of Fed officials. The August employment figures take on added importance, particularly for those officials who may be expected to offer resistance to a move in the third quarter. The odds still favor a rate hike in Q4, but September is quickly nearing a coin-flip proposition.”

“I do think it is time to move that rate,” Kansas City Fed President Esther George said. “It doesn't mean I favor high rates. It doesn't mean I think it needs to happen rapidly. But under conditions when we're seeing employment move [higher with] low and stable inflation, I think it's fair to say we could remove some of that accommodation.”

While the industry will be watching the August jobs report closely, Dallas Fed President Robert Kaplan said that won't be the only determining factor. “One jobs report is not going to drive our thinking,” Kaplan said. “[But] I do believe the case for removing accommodation is strengthening.”

If the Fed does raise the short-term interest rates in September, a spike in mortgage rates similar to the one the market experienced in 2013 is unlikely. Lorraine Woellert of Redfin recently cited a note from Wells Fargo economists to clients in which the economists stated that they “doubt the impact on the mortgage market would be as bad is it was in 2013,” according to Woellert. Many Fed policymakers have been hinting that a rate hike is imminent, so financial markets should be ready for it, unlike in 2013, Woellert said.

Click here to read Yellen’s full speech.