Liam Dann: What US Fed boss Janet Yellen said to make the kiwi dollar fall

Federal Reserve chair Janet Yellen defended the effectiveness of the US monetary policy regime. Photo / Getty

The kiwi dollar took a short sharp dive overnight as US Federal Reserve chair Janet Yellen delivered her highly anticipated speech of the state of the US economy from the central bankers conference in Jackson Hole Wyoming.

After trading as high as US73.35c on Thursday the kiwi was at US72.38c this morning - down about half a cent on yesterday aftrenoon.

Markets have been watching closely for signs the Fed is ready to start raising US interest rates, a move that would lift the US dollar and bring the kiwi down.

Yellen stopped short of saying when rates would rise but she was upbeat on the US outlook and her speech did enough to strengthen market perceptions that long promised rate hikes are coming - most likely in December but possibly as soon as September.

Yellen said the economy was "nearing" the Fed's goals of full employment and stable prices.

"Based on this economic outlook, the FOMC 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."

That statement did enough to meet the expectations that the market had built in around the speech - but only just.

Without any specific timetable for rate hikes many remain sceptical about the certainty of hikes.

The US central bank lifted the rate for the first time in almost a decade last December - to 0.5 per cent - and outlined plans for a series of hikes throughout 2016.

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But market turmoil early in the year and other global events like the Brexit vote in the UK have seen them stalled.

The timing from here will remain contingent on the flow of economic data in the US - particularly employment data - and ongoing market stability.

Based on recent history, it wouldn't take much to put them back on hold.

While the focus was on rates Yellen spent much of her speech dealing with the big issues that confront central banks around the world.

Without any specific timetable for rate hikes many remain sceptical about the certainty of hikes.

Many argue the power of central bankers has waned as rates of moved towards zero and there is risk that they won't have the tools to deal with future recessions.

Yellen defended the value and effectiveness of the current monetary policy regime.

Fears of it redundancy were "exaggerated," she said. In the event of another downturn the Fed would be able to use bond purchases and forward guidance to ease conditions.

But she did acknowledge that it may be worth exploring other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP.

- with additonal reporting from agencies