Fed rate rise unlikely after Yellen’s market turbulence warning

Bank chairwoman points to higher risks from China and slide in equity prices

Fed chairwoman Janet Yellen:   cautious assessment and emphasis on global risks marked a contrast to the more optimistic tone in December, when she hailed the Fed’s decision to raise rates. Photograph: Jim Lo Scalzo/EPA

Fed chairwoman Janet Yellen: cautious assessment and emphasis on global risks marked a contrast to the more optimistic tone in December, when she hailed the Fed’s decision to raise rates. Photograph: Jim Lo Scalzo/EPA

 
Federal Reserve

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

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

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)