WASHINGTON – Tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the government Reserve would need to reverse the rate tightening cycle it began in December, Fed Chair Janet Yellen told U.S. lawmakers on Wednesday.
Global risks have intensified and could slow the U.S. economy, but “I don’t expect the (Federal Open Market Committee) will probably be soon within the situation where it’s important to cut rates,” Yellen said. “There is definitely a risk of the recession…and global financial developments could produce a slowing in the economy.”
But “I think you want to take care not to jump to some premature conclusion by what is in store for the U.S. economy. I don’t think it is likely to be necessary to cut rates.”
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Yellen’s surveys are her first in public since the Fed raised rates in December and ended a seven-year stint where borrowing costs were held near zero.
In prepared remarks towards the House Committee on Financial Services she acknowledged a series of global problems that have become worse since that time. Financial conditions overall have tightened, driven by falling stock prices, uncertainty over China and a global reassessment of credit risk that could throw the U.S. economy off course.
Some of these problems threaten being self re-enforcing, with weak development in major manufacturers like China and oversupply on commodity markets rattling the earth’s oil and mineral exporters. A broad sense of a world slowdown, in turn, and uncertainty concerning the depth of China’s problems, could further tighten financial conditions for U.S. businesses and households.
“These developments, if they prove persistent, could weigh on the outlook for business activities and also the labor market,” Yellen said in her semi-annual appearance before lawmakers.
But in her own prepared remarks and solutions to lawmakers’ questions, Yellen emphasized a steady-as-she-goes account of Fed policy, with good reason to believe the United States economy continues to grow and allow the Fed to pursue its plan of “gradual” alterations in monetary policy.
“Ongoing employment gains and faster wage growth should support the growth of real incomes and for that reason consumer spending,” Yellen said. With other central banks maintaining loose monetary policy, “global economic growth should pick up with time.”
The Fed “expects by using gradual adjustments within the stance of monetary policy, business activities will expand in a moderate pace in coming years and that labor market indicators will continue to bolster,” Yellen said.
Investors have all but eliminated an interest rate hike throughout the year, but Yellen’s comments kept the central bank’s options open. U.S. stocks were mostly higher on Wednesday and the dollar crept up as well.
“Yellen appears to be maintaining her faith within the outlook from the U.S. economy but still anticipates to raise rates,” said Joe Manimbo, senior market analyst with Western Union Business Solutions.
A Fed report accompanying Yellen’s testimony said the U.S. financial sector “has been resilient” to stress in the oil downturn and weakening corporate debt markets around the world, with “limited” exposure to those problems among large U.S. banks. But “if conditions during these sectors worsen…wider stresses could emerge.”
? Thomson Reuters 2016
