US to stay on growth track de­spite global risks: Yellen

The Pak Banker - - FRONT PAGE -

Tight­en­ing fi­nan­cial con­di­tions driven by fall­ing stock prices, un­cer­tainty over China and a global re­assess­ment of credit risk could throw the US econ­omy off track from an oth­er­wise solid course, Fed­eral Re­serve Chair Janet Yellen said on Wed­nes­day in pre­pared tes­ti­mony to Congress.

In tes­ti­mony that com­bined a steady-asshe-goes ac­count of Fed pol­icy with an ac­knowl­edge­ment of in­ten­si­fy­ing risks, Yellen said there are good rea­sons to be­lieve the United States will stay on a path of mod­er­ate growth that will al­low the Fed to pur­sue "grad­ual" ad­just­ments to mon­e­tary pol­icy.

Fam­ily in­comes and wealth are ris­ing, do­mes­tic spend­ing "has con­tin­ued to ad­vance," and busi­ness in­vest­ment out­side the oil sec­tor ac­cel­er­ated in the se­cond half of the year, she said. Yellen said she ex­pects the la­bor mar­ket to con­tinue to im­prove and in­fla­tion even­tu­ally rise to­ward the Fed's tar­get de­spite a re­cent drop in in­fla­tion ex­pec­ta­tions cited by some pol­i­cy­mak­ers as par­tic­u­larly un­nerv­ing.

But Yellen ac­knowl­edged that some of the weak­nesses in the global econ­omy have be­come self re-en­forc­ing, with weak growth in ma­jor man­u­fac­tur­ers like China and over­sup­ply on com­mod­ity mar­kets rat­tling the world's oil and min­eral ex­porters. A broad sense of a world slow­down, in turn, and un­cer­tainty about the depth of China's prob­lems, has tight­ened fi­nan­cial con­di­tions for US busi­nesses.

"Th­ese de­vel­op­ments if they prove per­sis­tent, could weigh on the out­look for eco­nomic ac­tiv­ity and the labour mar­ket," Yellen said in re­marks pre­pared for her semi-an­nual ap­pear­ance be­fore the House Com­mit­tee on Fi­nan­cial Ser­vices. An ac­com­pa­ny­ing re­port said the US fi­nan­cial sec­tor "has been re­silient" to stress from oil and weak­en­ing cor­po­rate debt mar­kets around the world, with "lim­ited" ex­po­sure among large US banks. But "if con­di­tions in th­ese sec­tors worsen...wider stresses could emerge."

Mean­while, anal­y­sis by the ex­perts sug­gest that, The U.S. Fed­eral Re­serve's care­fully scripted de­ci­sion to raise in­ter­est rates last De­cem­ber, and be­gin a re­turn to "nor­mal" pol­icy, may now be­come a night­mare for the cen­tral bank if an eco­nomic down­turn forces a re­turn to un­con­ven­tional meth­ods.

Fed chair Janet Yellen told law­mak­ers this week she was study­ing ways to "be pre­pared" in the event the cur­rent slide in world stock mar­kets, con­cern about fi­nan­cial sec­tor stress, and slow­ing eco­nomic growth all trans­late into a re­ces­sion or an­other fi­nan­cial cri­sis.

But Yellen said the pol­icy tool of neg­a­tive in­ter­est rates, now fa­vored by some for­eign cen­tral banks of­fers no sure bet for the U.S. econ­omy.

"We need to con­sider the U.S. in­sti­tu­tional con­text. They are not au­to­matic...We pre­vi­ously stud­ied them and de­cided they would not work well," Yellen told the U.S. Se­nate Bank­ing Com­mit­tee on Thurs­day, when asked whether the Fed was "out of am­mu­ni­tion" to fight a new down­turn. Af­ter mis­tak­enly rais­ing in­ter­est rates briefly in 2011, the Euro­pean Cen­tral Bank turned to neg­a­tive in­ter­est rates last year as a pol­icy tool, and the Bank of Ja­pan fol­lowed suit in Jan­uary in an­other bid to avoid de­fla­tion and pro­mote eco­nomic growth.

Yellen's two days of tes­ti­mony to the U.S. Congress this week, a semi-an­nual ap­pear­ance man­dated by law, brought home the dilemma the Fed faces.

The plan to re­turn to "nor­mal" pol­icy was one Yellen en­gi­neered slowly dur­ing her first two years in of­fice, but was de­layed un­til De­cem­ber last year partly be­cause Fed of­fi­cials rec­og­nized they had lit­tle ma­neu­ver­ing room to fight any fresh down­turn. So far this year U.S. eco­nomic data points to con­tin­ued re­cov­ery, with steady job growth and do­mes­tic con­sump­tion giv­ing the Fed rea­son to stick to the plan for "grad­ual" in­ter­est rate rises this year, an­nounced on Dec. 16 last year.

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