Federal Reserve Chair Janet Yellen on Wednesday confirmed what everyone else has been thinking and waiting to hear: the Fed is wary of raising interest rates in an increasingly turbulent global economy.
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Even so, Yellen said she doesn’t anticipate lowering rates any time soon, either. “I don't expect the (policy-setting Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates,” Yellen said during a wide-ranging Q&A before a Congressional committee.
"There is always a risk of a recession...and global financial developments could produce a slowing in the economy,” she added. But “I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don't think it is going to be necessary to cut rates."
Earlier, in prepared remarks before the House Financial Services Committee, Yellen said the path of interest rates is not on a “preset course,” acknowledging that increasing concerns for economic growth both at home in the U.S. and abroad could derail the Fed’s plans to normalize U.S. monetary policy through higher borrowing costs.
In fact, Yellen conceded that rates could be lowered if the situation further sours.
“The actual path of the federal funds rate will depend on what incoming data will tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation...if the economy were to disappoint, a lower path to the federal funds rate would be appropriate,” Yellen said.
Responding to a handful of questions regarding the possibility of the Fed initiating a negative rate policy similar to those in place in Japan and across much of Europe, Yellen (as she has said before on several occasions) said that no option is off the table. She said the Fed has explored the possibility of negative rates in a worst-case-scenario, but that more studies need to be done to determine the impact on the U.S. banking and larger financial system.
“In the spirit of prudent planning we always look at what options we might have, either to tighten policy or loosen policy, we would look at it. I’m not prepared to say they’ve been thoroughly examined at this point,” Yellen said.
The Fed raised rates for the first time in nearly a decade in December, citing a strong U.S. labor market and projecting optimism that a tightening jobs market would raise wages and eventually push inflation higher toward the Fed’s 2% target. With that relatively rosy forecast in mind, the Fed hinted strongly that it would raise rates four more times in 2016 to a projected range of 1.25%-1.50%
But things went awry in early January when reports of a Chinese economic slowdown combined with uncertainty regarding the freefall in the price of oil to slam the U.S. stock market. After a five year bull run, stocks have plummeted to the fringes of a bear market.
Since the bad news hit early last month, investors, analysts and economists have been waiting for the Fed to scale back on their December projections. And they seem to have gotten just that from Yellen on Wednesday.
“Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar,” Yellen said according to her prepared remarks. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.”
The Fed was widely expected to follow up the December rate hike with another 0.25% bump in March, but that seems increasingly unlikely. The Fed declined to raise rates at their January meeting, to no one’s surprise, but they also declined to pare back their earlier forecasts. Yellen’s testimony Wednesday is far more dovish that the Fed’s January statement.
All is not gloom and doom, however. Yellen ticked off a laundry list of measures indicating the U.S. economy remains resilient even in the face of headwinds from overseas. The U.S. created 2.7 million new jobs in 2015, and 150,000 in January, she said. Since the darkest period for the labor market in the wake of the 2008 financial crisis the U.S. has regained 13 million jobs. Meanwhile, the unemployment rate fell to 4.9% in January, 0.8 percentage point below its level a year ago and in line with the median Fed estimates of its longer-run normal level.
“Other measures of labor market conditions have also shown solid improvement, with noticeable declines over the past year in the number of individuals who want and are available to work but have not actively searched recently, and in the number of people who are working part time but would rather work full time,” Yellen said.
And despite the current global turmoil, Yellen projected optimism for the long-term forecast for the U.S.
“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. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen,” she said.
Elsewhere, Yellen continued to defend the Fed against accusations mostly by Republican lawmakers that the Fed needs to improve transparency and accountability.
Texas GOP Rep. Jeb Hensarling, who chairs the committee, opened the hearing with a statement deeply critical of both the Fed and Obama administration policies. In the current over-regulated environment, “the Fed cannot substantially help our economy; it can only hurt it,” Hensarling said.
South Carolina GOP Rep. Mick Mulvaney continued the criticism, saying the Fed has expanded its powers well beyond its original mandate, that of maintaining price stability. Mulvaney said the U.S. economy (ie., consumers and business owners) would be better served if the Fed converted to a more-predictable “rules-based system.”
Yellen responded that the Fed “shouldn’t mechanically follow any rules” but instead adapt Fed policy according to an array of economic indicators.