US to stay on growth track despite global risks: Yellen
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.