Persistent global market turbulence could set back US growth and slow the pace of corporate hiring, the Federal Reserve chairwoman told Congress yesterday, underlining suggestions that the central bank is unlikely to repeat its December interest rate increase in the short term.
Janet Yellen said the US economy had made continued progress but she pointed to higher risks 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 dollar's rise.
“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.
Gradual increases
Ms Yellen did not back away from her policy of signalling “gradual” increases in interest rates, arguing that continued hiring and wage gains should support the economy while stimulative monetary policies overseas should buoy world growth. She did not explicitly discuss what might happen at the Fed’s next meeting on March 15th -16th.
However, Ms Yellen’s cautious assessment and emphasis on global risks marked a contrast to the more 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.
Ms Yellen defended the December rate increase, saying the Federal Open Market Committee believed that if it had delayed the beginning of normalisation too long it might have had to tighten abruptly, which could push the economy into a recession.
She said she did not think it would be necessary for the Fed to reverse course and cut rates. “That said, monetary policy is not on a preset course,” she said.
Markets have had a torrid opening to 2016, driven by tumbling commodity prices, fears over China’s growth and its volatile exchange rate policy, and concerns about central banks’ ability to continue propping up growth. The developments have increased discussion among economists about recession risks in the US and triggered criticism of the Fed’s December decision to tighten policy. Futures markets now point to no Fed moves at all this year.
The rally in U.S. stocks evaporated in the final hour of trading yesterday. The Dow Jones Index finishded 0.62% down.
Market indicator
The “yield curve” of US Treasury bonds, which has been a regular market indicator of recessions, has flattened sharply lately, with the difference between two and 10-year Treasury yields slipping just below 1 percentage point for the first time since January 2008 yesterday. 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 market volatility and damped global growth hopes, pulling down commodity prices and risking strains in commodity-exporting countries.
Pressed on the economic implications of the recent turmoil, Ms Yellen said she did not want to jump to premature conclusions. – (The Financial Times Limited 2016)
