Yellen signals Fed rate path hinges on turmoil
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.