Fed chair Janet Yellen signals rate hikes possible

Federal Reserve Chair Janet Yellen said on Monday that interest rate hikes are likely on the way because "positive economic forces have outweighed the negative" for the United States, though last month's weak jobs report bears watching.

In the last public comment from any U.S. central banker before a policy meeting next week, the Fed chief stressed that surprises could emerge that change her expectations for rates.

• Canadian dollar shoots up almost a cent after weak U.S. jobs report

• America added just 38,000 jobs in April, least since 2010

The hint at rate hikes ahead caused a steep dip in North American markets, which are trading at nine-month highs. However, after the initial shock, stocks seemed to resume their momentum as investors digested the rest of Yellen's message, which was cautious on the economy.

The speech was broadly buoyant, with Yellen listing four risks to the U.S. economy slower demand and productivity, and inflation and overseas risks before downplaying them all.

Rate increase 'likely'

"If incoming data are consistent with labour market conditions strengthening and inflation making progress toward our 2 per cent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives," Yellen said in Philadelphia.

She added that since the overall U.S. labour market has been "quite positive" the report of a sharp slowing in employment growth in May "was disappointing."

Amid the "countervailing forces," she said, "I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately."

The U.S. central bank raised rates from near zero in December in the first U.S. policy tightening in nearly a decade.

Prospects of another hike this month were all but killed by a report last week showing only 38,000 jobs were created in May, somewhat muting recent upbeat data on consumer spending, housing and overall U.S. growth.

Concern over jobs report

Although the report was "concerning, let me emphasize that one should never attach too much significance to any single monthly report," Yellen said.

"Other timely indicators from the labour market have been more positive."

Amid the "countervailing forces," she said, "I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately."

Economists now see September or possibly July as the most likely time for a quarter-point policy tightening, while traders in futures markets are betting on later in the year.

While Yellen did not repeat her line from a week-and-a-half ago when she said rate hikes would probably be appropriate in coming months, she said she remained optimistic inflation would rise to the Fed's 2per cent goal because oil prices had reversed their downward path and the dollar had steadied after a long period of gains.