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Quick Take: Expect Fed rate normalisation in Q2 2015, says UOB

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Federal Reserve chair Janet Yellen signalled in Washington on Tuesday that the US central bank is moving closer to a rate hike but will remain "patient". The Fed has kept its benchmark rate near zero since 2008.

FEDERAL Reserve chair Janet Yellen signalled in Washington on Tuesday that the US central bank is moving closer to a rate hike but will remain "patient". The Fed has kept its benchmark rate near zero since 2008.

UOB economist Alvin Liew said in his flash notes on Wednesday that Ms Yellen's comments have not changed UOB's view for the Fed to hike interest rates around mid-2015, possibly starting in the June 16-17 Federal Open Market Committee (FOMC) meeting.

"We continue to expect the Fed rate normalization to take place in 2Q-2015 (possibly starting in the 16-17 June 2015 FOMC) but there remains significant uncertainty around the timeline and the risk is for the hike to be delayed especially if there is a material deterioration in the external environment,'' Mr Liew said.

He noted that the change in forward guidance while keeping the flexibility to tighten when conditions are right are in line with Ms Yellen's efforts to shift away from calendar-based guidance and to be data-dependent.

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In her testimony to the US Senate Committee on Banking, Ms Yellen prepared markets for a change in the Fed's pledge to be "patient" on raising interest rates but at the same time she emphasised that it should not be read as representing "that the Committee will necessarily increase the target rate in a couple of meetings".

She was to deliver her next testimony before the Financial Services Committee later on Wednesday.

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