Fed chair Yellen to balance confidence with caution in testimony
When the Federal Reserve chair addresses lawmakers this week in Washington, she will have to strike a balance between sounding confident on the domestic economy and acknowledging increased risks from abroad. Two weeks after officials signaled interest rates may rise more slowly than previously expected, economists and investors will be trying to gauge Yellen's willingness to delay tightening at the March meeting.
With financial market-turmoil causing uncertainty about the outlook, energy prices damping inflation and the European Central Bank preparing a stimulus boost that may bolster the dollar, the market-implied probability for a rate increase next month has dropped to 10 percent from more than 50 percent at the start of the year. Policy makers including Vice Chairman Stanley Fischer have cautioned that it's still too soon to decide the next step.
"I don't think we should expect Yellen to throw the towel on a March hike," said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York. "She may emphasize the positives in the U.S. economy, particularly the still-strong labor market. Looking ahead, she may sound more cautious, and she will likely highlight that the negatives are mostly from abroad and that they are watching the global picture closely."
Yellen is scheduled to appear before the House Financial Services Committee at 10 a.m. Wednesday and will address the Senate Banking Committee the next day. She'll have evidence to support the Fed's view that the U.S. labor market remains solid and wages are showing signs of picking up.
Officials have softened their stance since the Fed raised interest rates in December for the first time in almost a decade and released forecasts showing that the median of officials' estimates expected policy tightening of 1 percentage point in 2016, probably spread over four quarter-point hikes.
U.S. economic growth slowed in the fourth quarter as businesses cut back investment, raising concern that weakening global trade will damp or even interrupt one of the longest periods of continuous expansion since World War II. Oil prices are close to the lowest level since 2003.
At the heart of the concern about the world economy is China, where policy makers are battling the slowest growth in 25 years, the depreciation in the yuan to the lowest value in five years and an equity sell-off that shook global markets, tightening financial conditions from the U.S. to Europe. The Standard & Poor's 500 Index is down 8 percent this year, while the Stoxx Europe 600 Index has lost 11 percent. "Yellen will acknowledge that the tightening in financial conditions since the December meeting could have a negative impact on the growth and inflation outlook," said Steven Friedman, senior investment strategist at BNP Paribas Investment Partners in New York. "But so long as she continues to signal a bias to raise rates, her comments are unlikely to lead to a meaningful improvement in market sentiment."