Fed could delay raising interest rates, Janet Yellen indicates

Federal Reserve Chairwoman Janet L. Yellen indicated Wednesday that the Federal Reserve could delay further raising a key interest rate while the U.S. economy faces increased risks from slower global growth and roiling financial markets.

But she said the U.S. appeared to be weathering the turmoil and that she did not think it would be necessary for the Fed to reverse course and reduce the benchmark short-term interest rate.

“We’ve not yet seen a sharp drop-off in growth either globally or in the United States, but we certainly recognize that global market developments bear close watching,” Yellen told members of the House Financial Services Committee.

Yellen also was quick to say that “monetary policy is not on a pre-set course” and that Fed officials were prepared to act if economic conditions worsened. She even suggested the Fed would consider negative interest rates, an extraordinary step taken recently by the Bank of Japan and the European Central Bank to try to stimulate economic growth.

In the much-anticipated hearing, in which she made her first public comments in eight weeks, Yellen tried to calm financial markets while keeping all options on the table.

She appeared to accomplish the task: The Dow Jones industrial average and other major stock indexes rose after her comments, although they lost most of those gains by the time the markets closed.

“Figuratively speaking, Janet Yellen held Mr. Market’s hand and allowed markets to stabilize, at least for now,” said John Lonski, chief economist at Moody’s Capital Markets Research Group.

“It seems she succeeded in calming a very jittery market, but there’s no guarantee this lesser anxiety will last,” he said.

The indexes trimmed their gains as the hearing went on, but much of the questioning involved regulation and issues other than future rate hikes and the state of the U.S. economy.

Financial markets in the U.S. and abroad began tumbling at the start of the year, mirroring a steep drop in oil prices, and have been roiled ever since.

On top of that, new data show that U.S. economic growth slowed at the end of last year as the economies of China and other nations have faltered.

“Foreign economic developments, in particular, pose risks to U.S. economic growth,” Yellen said. But she tried to allay concerns by saying that “recent economic indicators do not suggest a sharp slowdown in Chinese growth.”

Still, she noted that uncertainty about the global economy triggered “increased volatility” in financial markets and “exacerbated concerns” about worldwide growth. The concerns helped push down the price of oil and other commodities, which “could trigger financial stresses in commodity-exporting economies.”

Low oil prices have caused inflation in the U.S. to run well below the Fed’s 2% annual target.

Yellen said she and other members of the policymaking Federal Open Market Committee are “closely monitoring global economic and financial developments” and assessing their implications for the U.S.

In December, Fed officials nudged up the central bank’s benchmark short-term interest rate for the first time in nearly a decade. The move came as the U.S. labor market wrapped up two years of robust growth and was seen as a validation of the strength of the recovery from the Great Recession.

At the same time the so-called federal funds rate was increased by 0.25 of a percentage point, a majority of the Fed’s 17 policymakers projected that the central bank would enact four similar small hikes this year.

Analysts had anticipated the first such hike would be in March. But the recent market turmoil, as well as the data showing U.S. growth slowed at the end of last year, has led to speculation that Fed policymakers will wait on the next rate increase.

On Wednesday, Yellen offered no regret about the December rate hike, which some analysts have said contributed to the recent financial market troubles. Yellen said the move was justified by significant improvement in the labor market. Waiting longer to raise the rate would have risked needing to move too quickly to get it back to a more normal level, she said.

Although U.S. financial conditions have worsened a bit since December, Yellen said Fed policymakers expect “that with gradual adjustments in the stance of monetary policy,” the economy will continue to grow moderately and the job market will continue to strengthen.

But she indicated the first of those gradual adjustments to the federal funds rate could be delayed depending on economic conditions and how they would affect the Fed’s dual mandate to keep unemployment low and inflation stable.

Fed officials next meet March 15 and 16.

Although she noted that “financial conditions in the United States have recently become less supportive of growth,” Yellen was mostly upbeat about the state of the U.S. economy.

“The economy is in many ways close to normal,” Yellen said. She added that was an assessment based mostly on improvements in the labor market. The unemployment rate was 4.9% in January.

But Yellen faced bipartisan criticism — though much sharper from Republicans than Democrats — about sluggish economy growth and lagging wages for average workers.

About a dozen members of Fed Up,  a coalition of labor, community and liberal activist groups, sat in the audience wearing green T-shirts that read, “Let our wages grow!” or “Whose recovery?” The coalition opposes raising interest rates until there is more improvement in the labor market.

Several members of the House Financial Services Committee pressed Yellen on unemployment rates for Latinos and blacks, which are much higher than the national average.

“Absent of a full recovery, I fear that further raising rates is a step that takes us further away from what is needed to ensure that the needs of vulnerable populations are met,” said Rep. Maxine Waters (D-Los Angeles).

Yellen said the economy has improved significantly since the Great Recession and noted some recent “hopeful signs” of wage growth. But, she acknowledged, “there are many households that are suffering.”

Article courtesy of the LA Times