Yellen sig­nals Fed rate path hinges on tur­moil

The Pak Banker - - FRONT PAGE -

Chair Janet Yellen said the Fed­eral Re­serve still ex­pects to raise in­ter­est rates grad­u­ally while mak­ing it clear that con­tin­ued mar­ket tur­moil could throw the cen­tral bank off course from the mul­ti­ple in­creases that pol­icy mak­ers have fore­cast for 2016.

"Fi­nan­cial con­di­tions in the United States have re­cently be­come less sup­port­ive of growth," Yellen said in tes­ti­mony pre­pared for de­liv­ery Wed­nes­day be­fore the House Fi­nan­cial Ser­vices Com­mit­tee in Wash­ing­ton. "Th­ese de­vel­op­ments, if they prove per­sis­tent, could weigh on the out­look for eco­nomic ac­tiv­ity and the la­bor mar­ket."

Yellen, 69, kicked off two sched­uled days of tes­ti­mony on Capi­tol Hill by also telling law­mak­ers that un­cer­tainty over China's eco­nomic prospects and ex­change-rate pol­icy had "ex­ac­er­bated con­cerns about the out­look for global growth" and con­trib­uted to the lat­est drops in oil and other com­modi­ties. The risk for the U.S. econ­omy is if the com­modi­ties bust trig­gers stresses around the world that threaten de­mand for U.S. ex­ports, she said.

Yellen kept the door open for a rate in­crease in March, though she didn't ex­plic­itly re­fer to any tight­en­ing time­line or the Fed's next meet­ing. "Of course, mon­e­tary pol­icy is by no means on a pre­set course," Yellen said.

Eight weeks af­ter rais­ing in­ter­est rates for the first time in nearly a decade, Fed of­fi­cials are strug­gling to judge whether fi­nan­cial mar­ket tur­moil and a dim­mer out­look abroad un­der­mine their U.S. fore­cast and the need for ad­di­tional pol­icy tight­en­ing. They next gather to con­sider a rate change on March 15-16.

With her tes­ti­mony on Wed­nes­day, Yellen joined Vice Chair­man Stan­ley Fis­cher and other se­nior Fed of­fi­cials in declar­ing it's too soon to tell whether sharp drops in stocks, oil prices and some bond yields rep­re­sent pass­ing volatil­ity or re­flect wors­en­ing global eco­nomic fun­da­men­tals that will dampen growth and in­fla­tion in the U.S.

Even as she de­tailed the risks to her out­look, Yellen in­di­cated that the Fed­eral Open Mar­ket Com­mit­tee hadn't changed its view that the U.S. econ­omy will merit con­tin­ued, though slow, tight­en­ing of mon­e­tary pol­icy this year.

"The FOMC an­tic­i­pates that eco­nomic con­di­tions will evolve in a man­ner that will war­rant only grad­ual in­creases in the fed­eral funds rate," Yellen said, re­peat­ing lan­guage from the com­mit­tee's Jan­uary state­ment al­most ver­ba­tim.

Yellen noted that U.S. eco­nomic growth in 2015 slowed to an es­ti­mated 1.75 per­cent, re­strained es­pe­cially by the im­pact of a strength­ened dol­lar on ex­porters. Still, she said, house­hold spend­ing had got­ten a boost from lower fuel prices and steady jobs growth, a trend she ex­pected will con­tinue.

"On­go­ing em­ploy­ment gains and faster wage growth should sup­port the growth of real in­comes and there­fore con­sumer spend­ing, and global eco­nomic growth should pick up over time, sup­ported by highly ac­com­moda­tive mon­e­tary poli­cies abroad," Yellen said.

The Fed chair re­peated her pro­jec­tions that in­fla­tion will even­tu­ally move back to­ward the bank's 2 per­cent tar­get, down­play­ing con­cerns over de­clines in in­fla­tion ex­pec­ta­tions.

She at­trib­uted the drop in mar­ket­based mea­sures of in­fla­tion ex­pec­ta­tions to tech­ni­cal rea­sons, cit­ing changes in risk and liq­uid­ity pre­mi­ums in the mar­ket for U.S. Trea­suries. Sur­vey-based mea­sures of ex­pec­ta­tions are low but "rea­son­ably sta­ble," Yellen said.

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