Yellen anticipates US rates rise this year

With an effort to stress that the Fed's reaction function has not shift from US jobs and inflation to global events and financial markets, Fed's chair Yellen argued that slack in the US economy has diminished to a point where inflation pressures start to build in coming years. 

While inflation pressures are not asserting themselves yet because of a strong USD and falling import prices, Yellen predicted that inflation will rise as the transitory impact of these factors diminish.

Fed Chair Yellen made a clear attempt to guide markets, arguing the case for raising rates later this year. "Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter, " Yellen said in a 40-page speech at the University of Massachusetts.

"The fact that she included "I anticipate" is clearly a hawkish signal to markets and to those commentators, who after last's week's FOMC meeting concluded that the Fed had taken a decisive shift towards dovishness. Overall, Yellen's speech gave support to the conclusion that the Fed's still believes the Philips curve is intact", says Nordea Bank. 

The Fed needs to get in front of this, Yellen said, to avoid the risk of having to tighten very aggressively at a later stage and to prevent excessive risk-taking in financial markets.