Yellen says economic outlook looks shaky
US Federal Reserve Chairwoman Janet Yellen threw the possibility of more interest rate hikes up in the air.
As she delivered her semiannual testimony on US monetary policy to Congress on Wednesday, Yellen said the current economic outlook was throwing a serious wrench into the central bank’s plans for raising short-term interest rates.
After raising short-term interest rates from near zero in December, the first increase in seven years, the Fed has said it intended to raise rates another four times this year. But it seems the Fed may have waited too long and now the world isn’t cooperating.
Yellen kicked off two days of testimony before House and Senate committees by saying that financial conditions have become less supportive of economic growth. She pointed to the slowing economic activity in China and other countries, as well as how falling commodity prices are lowering expectations for rising inflation. And of course, there’s the sentiment that has sent global stock markets tumbling into corrections around the world.
Yellen didn’t explicitly say she was going to delay raising rates, Fed Chairs never speak so clearly, but that was definitely the take-away.
“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,” Ms. Yellen said. “These developments, if they persist, 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.”
Then, in the double-talk the Fed is famous for, Yellen said the Fed would continue to try raising rates. She said, the Fed “anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” effectively leaving further rate increases as an option.
Still, investors, who have blamed the December rate increase as a poorly timed move that actually hurt the world economy, welcomed the news. US stock markets rose on the news and the price of gold fell. European markets, which closed right after the comments, ended higher, but Asian markets, which closed before Yellen spoke, ended the day mostly down.
The Fed’s next policy meeting is March 15-16. Traders see little chance of a move before then and just a 19% chance the Fed will move at all again this year, according to the Chicago Mercantile Exchange.