Janet Yellen, Chair of the Federal Reserve, shared new insights on the future path of the
economy at an influential conference this past weekend in Jackson Hole, Wyoming. Speaking to leading central bankers from around the world, she made several important remarks.
First, she announced that the probability of an interest rate hike had increased in recent months. This follows more restrained language in June and July in the aftermath of the Brexit vote. Markets are now predicting about a 40% chance the Federal Reserve increases rates by 0.25% in September (up from only a 2% chance predicted last month) and if not then, a close to a 65% chance of a December hike (up from a 12% chance predicted in July). An increase in interest rates would likely increase demand for U.S. dollars as investors would earn a higher rate for holding cash in the U.S. versus other developed countries.
Despite the increased chance of a short term bump in rates, she expects that future interest rates will be significantly lower than in the period 1965-2000 when rates averaged north of 7%. She also remarked that if the Federal Reserve is successful in its goal of trying to keep inflation at around 2%, inflation will be significantly lower than during the 70s and 80s.
If her comments hold true, investors should be prepared for relatively low interest rates for the foreseeable future and less inflation than they may be accustomed to from the past. Investors waiting for significantly higher yields from bank accounts may well be disappointed.