Fed's Yellen flags rate hikes on 'meeting-by-meeting' basis

The Federal Reserve is preparing to consider interest rate hikes "on a meeting-by-meeting basis," Fed Chair Janet Yellen told a congressional committee on Tuesday, a subtle shift of emphasis that helps lay the groundwork for the Fed's first rate hike since 2006.

In remarks to the Senate Banking Committee, Yellen described how the Fed's rate-setting policy committee will likely proceed in coming months - first by removing the word "patient" in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting.

That approach could open the door to an interest rate increase as early as June, though investors interpreted Yellen's testimony overall as likely indicating a later date for liftoff. By the end of her two-hour appearance before the Senate Banking Committee, short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October, according to data collected and analyzed by CME FedWatch.

Yellen, however, said that even as the Fed refines its language in coming weeks, investors should not construe that as a sign the central bank is wed to a rate hike at any particular meeting. Rather, she said, when the word "patient" disappears it means the Fed will merely have full flexibility to act if its judges the economic data warrant it.

The Fed has been struggling in recent months to move away from the sort of forward guidance it has relied on through the crisis to influence market behavior, without at the same time triggering a market overreaction with each tweak to its policy statement. Yellen's comments on Tuesday marked another step in that process.

"If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis," Yellen said.

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