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Fed could raise rates to 1% by February: RBS economist Girard

Federal Reserve Chair Janet Yellen will appear before Congress for a second day on Tuesday to give her semi-annual testimony on the economy. And we could be witnessing an end of an era, “when we next hear from her, in this kind of forum next February, we could be looking at the funds rate, closer to perhaps even 1%,” said Michelle Girard, the U.S. chief economist at the Royal Bank of Scotland (RBS).

“The Fed chair has signaled to the markets and the American people that it’s probably the time for interest rates to start moving higher, at the very least, getting off this zero level,” said the economist. Her firm is standing by its call for the Fed’s first rate hike to be in September.

Fed chair Janet Yellen confirmed her plans to raise rates this year “barring any surprises” at Tuesday’s hearing.

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Despite the turmoil in Greece and the weakness in China’s equity market, Girard said, “so far, none of that has dissuaded the Fed from their view when it comes to their confidence on the U.S. economy.” She believes any surprises to hold back a Fed rate hike will “completely depend…on U.S. economic data.”

Investors shouldn’t expect consistent increases after after the Fed begins to hike rates. "The guidance is certainly kind of every other meeting, maybe once a quarter,” said Girard. “That’s a much slower pace than they’ve ever gone historically.”

The Fed is also under pressure, especially surrounding its bond-buying program.

"Remember the Fed is an independent operator," Girard said. "That’s crucially important for the markets to know that the Fed can take action and act independently away from any pressure from Congress.”

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