Did US Federal Reserve Chief Janet Yellen Signal A Red or Green Light For An Interest Rate Hike?

Have you ever seen a traffic light that turns red and green at the same time?

If you are a driver, what should you do if you should see such conflicting signals? Thankfully, traffic signals are rarely, if ever, that confusing. But the same cannot be said about the investing world.

Central banks are one component of the investing world that’s not known for their clarity. For instance, the US Federal Reserve chief, Janet Yellen, had sent out some very mixed messages in her recent speech at the New York Economic Club.

She acknowledged the strength of the US economy, which grew by 1.4% in the final quarter of last year. That was better than market expectations. Unemployment, at 4.9%, was also low. Consequently, she remarked that the US economy was remarkably resilient.”

But after building the case for an interest rate hike, she cited concerns over China’s economy. In one fell swoop she succeeded in confusing just about everyone. Both red and green lights were lit at the same time.

The key point to note is that Yellen was appointed by the President of the United States, and not the President of China. So, when she has to choose between inflationary pressures in the United States and problems in China, she should choose to contain inflation. This is provided that China does not screw up massively. There are no guarantees that it won’t but it is not in China’s interest to repeat mistakes of the recent past.

Developments in the US regarding the Federal Reserve’s actions and views on interest rates can be important for investors in Singapore to note as a hike in interest rates there could benefit banks here, which include DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), and Oversea-Chinese Banking Corp Limited (SGX: O39). The banks can profit from the interest rate differential that they charge borrowers and pay savers.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat owns shares in DBS Group Holdings.