Global financial market turbulence could set back US growth and corporate hiring if it persists, the Federal Reserve chair told Congress on Wednesday, in words that will further reduce expectations of near-term increases in interest rates.
Janet Yellen pointed to risks to the US from China and said financial conditions had become “less supportive” of US growth, citing the recent slide in equity prices, higher credit costs for riskier borrowers and the rise in the dollar, which has been battering exporters.
“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market, although declines in longer-term interest rates and oil prices provide some offset,” she said in a statement to the House Financial Services Committee.
Ms Yellen stuck, however, with her existing policy of signalling “gradual” increases in interest rates, arguing that continued hiring and wage gains should support the US economy while stimulative monetary policies overseas should buoy world growth.
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Her cautious assessment marked a contrast to the optimistic tone of her last public statement in December, when she hailed the Fed’s decision to lift short-term rates by a quarter-point as a sign of the progress that had been made by the US economy since the Great Recession.
Since then financial markets have had a torrid opening to 2016, driven by tumbling commodity prices, fears over Chinese growth and its volatile exchange rate policy, and concerns about the ability of central banks to continue propping up growth. The developments have led to increased discussion among economists about the risks of a recession in the US, and have triggered criticism of the Fed’s December decision to tighten policy.
Ms Yellen did not explicitly discuss what might happen at the Fed’s next meeting, but key colleagues have openly suggested a March move could become less likely — supporting a conclusion that financial markets came to some time ago with futures pointing to no moves at all in 2016. Bill Dudley, the New York Fed chief, said last month that if the harsher conditions in financial markets were still in place at the time of the Fed’s March meeting it would have to take this into account.
Gross domestic product growth slowed in the US in the fourth quarter, but the latest jobs data offered little evidence that the economy was faltering, with the unemployment rate falling below 5 percent and more workers feeling confident enough to voluntarily quit their jobs. The main concerns have stemmed from international and market developments, including the 20 percent run-up in the dollar, which has weighed heavily on exports.
In her testimony, Ms Yellen singled out China as a central risk factor. Recent indicators did not suggest a sharp slowdown in Chinese growth, but the declines in the value of the country’s currency have “intensified uncertainty about China’s exchange rate policy and the prospects for its economy,” she said.
This, Ms Yellen explained, had heightened financial market volatility and damped global growth hopes, pulling down commodity prices and risking financial strains in commodity-exporting countries. “Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further.”
With the decline in oil prices, inflation was likely to remain low in the near term, Ms Yellen added. She said it was noteworthy that market-based inflation expectations were at historically low levels; while survey-based measures had also declined, they remained “reasonably stable”.
Ms Yellen insisted on Wednesday that even after lift-off in December that US policy remained accommodative and held to the view that with gradual moves in interest rates economic activity would expand at a “moderate pace” and the labour market would continue to strengthen.
Growth in the US could also exceed the Fed’s projections — in particular, if low oil prices provided more of a boost to consumers than the central bank expected. While domestic demand slowed in the fourth quarter, it has continued to grow, and once oil and import prices stop falling the downward pressure on inflation should abate, she added.
Ms Yellen defended the December rate increase, saying that the Federal Open Market Committee believed that if it delayed the beginning of normalisation too long it might have to tighten abruptly, which could push the economy into a recession. Looking ahead, monetary policy was “by no means on a preset course” and rates could rise more quickly or more slowly than expected, she said.
Date: February 10, 2016