In her testimony before the House Financial Services Committee , Yellen was not explicit on whether the Fed will bump up its benchmark interest rate again in March after lifting it in December for the first time in nine years.
But her remarks suggest the overseas weakness and market distress could threaten the Fed's plans to raise the rate gradually this year, including an increase at its March 15-16 meeting.
Yellen said financial conditions have become “less supportive of growth,” citing higher Interest rates for riskier borrowers and the strengthening dollar, which has hurt exports, in addition to the fall in stocks.
"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices could provide some offset," Yellen said in her semiannual monetary policy report to Congress.
She added: "Foreign economic developments, in particular, pose risks to US economic growth." She singled out the economic slowdown in China.
In response to lawmakers' questions, Yellen said the Fed has not seen a slackening in the global economy that's dramatic enough to warrant the sharp market selloff. Still, she said, "We are watching very carefully what's happening in global financial markets." The market troubles themselves could dent business confidence and growth.
Yellen also pointed to market-based inflation measures -- such as yields on certain Treasury notes -- that have fallen to "historically low levels." The Fed is hesitant to raise interest rates further without clear signs that feeble inflation is picking up. Yellen noted inflation has been pushed down largely by low oil prices and the robust dollar, which makes imports cheaper for U.S. consumers. She said those effects eventually should ease.
At the same time, Yellen said solid job growth and faster wage gains should continue to support the economy. The economy, she noted, added 2.7 million jobs in 2015 and the unemployment rate fell nearly a percentage point the past year to 4.9%.
Yellen said she doesn't believe the recent slowdown in growth augurs a rate cut. "I do not expect (the Fed's policymaking committee) is going to be in a situation where it is necessary to cut rates," she said.
Still, Yellen's assessment indicates Fed policymakers are keenly aware of the potential impact recent global economic and market turbulence could have on the economy.
Although the Fed chief didn't provide a clear signal on the Fed's plans for March, "There is enough focus on downside risks now to make a tightening move again that soon seem quite unlikely," Jim O'Sullivan, chief U.S. economist of High Frequency Economics, wrote in a note to clients.
The Fed faces a quandary as it weighs whether to raise rates next month. Markets have sold off this year on overseas economic troubles, plunging oil prices and the prospect of future Fed hikes.
Stock analysts were looking to Yellen to calm markets by saying the Fed is concerned about the turbulence and signaling that a March rate hike is now a long shot. Volatile stocks can sap consumer and business confidence, tamping down economic growth without the need for the Fed to pile on by boosting rates. When global weakness similarly rocked markets in September, the Fed held off on a rate increase.
In late January, Fed policymakers kept interest rates unchanged and said the central bank is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” By removing its previous assessment that risks to its outlook were balanced, the Fed raised concerns about the trouble spots without ruling out a March rate increase.
Yet futures markets are giving less than 20% odds of another rate hike this year, a stance that economists say is too complacent.
Although the U.S. economy weakened in the fourth quarter, job growth was unusually strong, with average gains of 279,000 a month. And although payroll advances slowed in January, average wages rose sharply as the unemployment rate fell to an eight-year low of 4.9%. That, and other labor market indicators, suggest wages may be poised to climb more rapidly as the pool of available workers shrinks. That could eventually nudge up inflation, which has been stifled by a strong dollar and low oil prices, intensifying the pressure on the Fed to raise rates.
Because of the conflicting signals sent by the economy and markets, economists have said Yellen is likely to voice concerns about the strains abroad while emphasizing the Fed is keeping its options open pending economic data and market developments in coming weeks.
Source: USATODAY
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