Fed not likely to reverse course on rates despite growing global risks, Janet Yellen tells Congress

WASHINGTON – Tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the government Reserve will have 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 chop rates,” Yellen said. “There is always a danger of a recession…and global financial developments could create a slowing throughout the economy.”

But “I think we want to be careful not to jump to some premature conclusion about what is in store for that U.S. economy. I don’t believe it is going to be necessary to cut rates.”

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Yellen’s comments are her first in public because 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 grown worse since then. Financial conditions overall have tightened, driven by falling stock values, uncertainty over China and a global reassessment of credit risk that may toss the U.S. economy off track.

Some of those problems threaten to become self re-enforcing, with weak development in major manufacturers like China and oversupply on commodity markets rattling the world’s oil and mineral exporters. An extensive sense of a world slowdown, consequently, 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 around the outlook for economic activity and also the labor market,” Yellen said in her semi-annual appearance before lawmakers.

But in her own prepared remarks and answers to lawmakers’ questions, Yellen emphasized a steady-as-she-goes account of Fed policy, with higher reason to think the United States economy will continue to develop and allow the Fed to pursue its plan of “gradual” alterations in monetary policy.

“Ongoing employment gains and faster wage growth should offer the growth of real incomes and therefore consumer spending,” Yellen said. With other central banks maintaining loose monetary policy, “global economic growth should get with time.”

The Fed “expects that with gradual adjustments within the stance of monetary policy, economic activity will expand in a moderate pace in coming years which labor market indicators continues to bolster,” Yellen said.

Investors have all but ruled out a 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 of the U.S. economy and still anticipates to boost 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 all over the world, with “limited” contact with those problems among large U.S. banks. But “if conditions in these sectors worsen…wider stresses could emerge.”

? Thomson Reuters 2016