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Yellen warns of rising risks to US economy

Feb 10 2016 23:28
US Federal Reserve chair Janet Yellen testifies be

US Federal Reserve chair Janet Yellen testifies before the House Financial Services Committee on Capitol Hill in Washington. (Nicholas Kamm, AFP)

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The Fed and us

 

Washington - Federal Reserve Chair Janet Yellen warned on Wednesday that the US economy faced risks from tightening domestic financial conditions as well as global economic turmoil.

Expressing more pronounced concerns than when she last spoke publicly in December, Yellen told a congressional hearing that the outlook for the US economy had become more cloudy.

She made no comment on whether the Fed still expected to continue raising interest rates this year, but analysts said her concerns lowered the possibility of an increase in its next policy meeting in March.

"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," she told the House Financial Services Committee.

"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market."

Yellen said the Federal Open Market Committee (FOMC), the Fed's policy body, sticks by its central view of the economy in recent months, that it will continue to grow at a moderate pace this year.

She noted that recent employment gains and a tentative pickup in wages "should support the growth of real incomes and therefore consumer spending".

That supported the Fed's pursuit of a "gradual" increase in interest rates, she said.

And she dismissed questions of whether there was a need to actually reduce rates, even into negative territory as the Japanese and European central banks have done.

"I do not expect that the FOMC is going to be soon in this situation where it's necessary to cut rates," she said.

"Let's remember that the labour market is continuing to perform well."

China uncertainty

Even so, she told the panel that market turmoil abroad was buffeting US economic momentum, and could drag down US growth.

The sharp fall in commodity prices - which she linked in part to "uncertainty" about China's economy and its policies - threatened to "trigger financial stresses" in commodity-exporting countries and companies.

"Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further."

Analysts said Yellen's warning reduced the likelihood that the Fed would raise rates again next month, but left open the possibility of a hike at midyear if US growth remains steady.

The Fed increased its benchmark federal funds rate, held near zero for seven years, to 0.25% - 0.50% in December, and FOMC projections at the time implied it could raise rates another four times this year, by 0.25 percentage point each time.

Yellen's emphasis on the downside risks to the economy "makes an increase in the funds rate in March very unlikely," said PNC Bank senior economist Gus Faucher.

Yellen remained confident that the unemployment rate will continue to fall from the current 4.9% and that inflation, held extremely low by transient factors like the oil price crash, would eventually turn up toward the Fed's 2.0%target.

Even so, Yellen noted there was still "some slack" in the jobs market and acknowledged that inflation has not moved up as fast as the FOMC expected.

She singled out China as a source of some of the major risk to US growth, through a chain of spillover effects from its uncertain policy on the yuan currency, or renminbi.

"This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth."

Markets, where expectations have risen that the Fed might not raise interest rates again until the end of this year or even 2017, showed disappointment that Yellen did not make clear a slower pace for rate rises.

The dollar rose from about $1.1266 per euro before her statement to $1.1229 in midday trade, and short-term US Treasury bond yields rose. On the stock market, though, the S&P 500 was up 1.0%.

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janet yellen  |  us economy  |  interest rates

 
 
 
 

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