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In a much-anticipated speech Friday at the central bank's annual Jackson Hole summit, Fed Chair Janet Yellen voiced optimism about the economy and an expectation that interest rate hikes are ahead.
The Federal Open Market Committee "continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives," Yellen said in prepared remarks.
More pointedly, she added, "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."
After she spoke, Vice Chairman Stanley Fischer told CNBC the August jobs report being released next Friday "will probably weigh in our decision, along with other data that may come in."
James Bullard, another voting member of the FOMC, told CNBC earlier Friday that the Sept. 20-21 Fed meeting might be a good time to raise rates. And Loretta Mester, who is also a voting member, told CNBC before Yellen spoke that she expects to some signs of strengthening in the U.S. economy in the second half of 2016.
Government bond yields quickly moved higher after Yellen's remarks were released, while stocks were lower in early afternooon trading. The U.S. dollar was flat against the euro but down 0.3 percent against a basket of global currencies.
"The pre-prepared text from Yellen's speech at Jackson Hole today didn't necessarily offer much in the way of surprises but it did confirm one thing, there is now a clear and public hawkish consensus building within the Fed and Chair Yellen is on board," said Craig Erlam, senior market analyst at currencies trading platform OANDA.
After digesting Yellen's remarks, traders moved up the chances of a rate hike in the months ahead.
The possibility of a December hike, around 50 percent before Yellen's remarks, moved up to 60.2 percent, according to the CME. The market continues to doubt anything happening in September — less than two months before the presidential election — though the probability for a move jumped to 30 percent.
"Ultimately we think Yellen's speech really doesn't give us anything new," said Chris Gaffney, president of World Markets at EverBank. "They continue to be data dependent and the members still 'believe' growth will return in the coming months — but the data continue to prove them wrong so the Fed's credibility continues to come into question."
The Fed in December approved a quarter-point hike, its first move in more than nine years after anchoring its rate target near zero during the financial crisis and Great Recession. However, at that meeting FOMC members indicated that four more hikes were on the way in 2016.
A wobbly economy, low inflation and turmoil abroad had kept the Fed from continuing rate normalization. Going into the Yellen speech, the market was anticipating a coin-flip chance of any increase at all this year.
But Yellen said the jobs market is nearing full employment and inflation is ticking toward the Fed's 2 percent goal, despite downward pressure from "the transitory effects of earlier declines in energy and import prices."
On the downside, Yellen continues to worry about low business investment and declining productivity.
The speech otherwise was an academic exercise exploring whether the Fed has the tools to respond to another financial crisis. Critics worry that the low funds rate — currently targeted between 0.25 and 0.5 percent — will prevent the Fed from having latitude should a crisis on the scale of the 2008 one materialize.
Yellen defended the Fed's position, though she did acknowledge some limitations.
"In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly — although with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced," she said.