Fed cautious on rates due to Brexit
U.S. chair waits to see what market will bear
WA S HI NGT ON • By offering a subtle change to her outlook from less than a week ago, Federal Reserve Chair Janet Yellen pushed the prospect of additional interest rate increases further into the future.
The head of the central bank said she and her colleagues were on watch for whether, rather than when, the U.S. economy would show clear signs of improvement, acknowledging the possibility t hat growth would be slow to pick up.
“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labour market will strengthen further, and whether inflation will continue to make progress toward our tqo per cent objective,” Yellen said in testimony Tuesday before the Senate Banking Committee in Washington.
Responding to questions from lawmakers, Yellen said the odd sofa U.S. recession were low. She also said the central bank stood ready to act if needed in the event U. K. voters decide later this week to leave the EU, causing financial- market turmoil.
“We will closely monitor what the economic consequences will be and are prepared to act in light of that assessment,” she said.
Fed policy- makers on June 15 left their benchmark interest rate unchanged and signalled their confidence in the economy’s momentum had wavered after payroll growth slowed in April and May. At the meeting, six of the Federal Open Market Committee’s 17 members forecast one quarter- point rate increase this year, compared with one person making such a forecast in March, though the median projection remained at two hikes.
Yellen on Tuesday repeated a message she offered last week that, in the short term, the Fed expects the economy to rebound from a disappointing first quarter, and that she continued to foresee “gradual” rate increases without offering a firm timetable.
Y ellen acknowledged a slowdown in hiring, reflected in an especially poor employment report for May, but warned against placing too much emphasis on just a few monthly readings.
“It is important not to overreact to one or two reports, and several other timely indicators of labour market conditions still look favourable,” she said.
In her prepared remarks, the Fed chair mentioned several potential threats to the economy from outside the U.S ., including those from uncertainty over China’s expansion and from Thursday’s vote in the U. K. over whether to remain in the European Union.
“AU. K. vote to exit the European Union could have significant economic repercussions,” she said in her opening statement, following remarks last week that the upcoming referendum was a factor in the Fed’s decision to keep rates steady.
In its monetary policy report accompanying Yellen’s testimony, the Fed warned that prices in the U.S. commercial real estate market may have run too far too fast. Valuations “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” according to the report.
Overall, Yellen’s message was one of continued caution and uncertainty.
“The FOMC continues to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate ,” she said, reiterating language from the committee’s June 15 statement.
Based on prices of federal funds futures contracts after Yellen’s testimony on Tuesday, investors saw only an 10 per cent chance of a rate hike when Fed policy makers next meet, on July 26-27.
Yellen is scheduled to appear before the House Financial Services Committee on Wednesday.