Global risks and a U.S. hiring slowdown warrant a cautious approach to raising interest rates as the Federal Reserve looks for confirmation that the country’s economic recovery remains on track, Fed Chair Janet Yellen said on Tuesday.
In prepared testimony before the Senate Banking Committee, Yellen outlined how the central bank was thrown off course within weeks of raising rates last December by a slowdown in domestic growth and international events, including concerns over China’s economy and a further collapse in oil prices.
Some of those clouds remain, Yellen said in comments that seemed to signal no pressing need for the Fed to raise rates.
Before a further tightening of monetary policy, she said, the Fed needs to be sure U.S. economic growth and hiring have rebounded and there is no shock from the outcome of Britain’s June 23 vote on whether to leave the European Union.
“The pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach … remains appropriate,” Yellen said.
“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress,” she said.
With a weak global economy, low U.S. productivity and other factors holding down interest rates in the long run, Yellen said the Fed’s benchmark overnight interest rate is likely to remain low “for some time.”
Current Fed policymakers’ forecasts foresee two rate increases this year and three each in 2017 and 2018, a slower pace from their projections in March.
Job gains averaged 200,000 per month in the first quarter but averaged only about 80,000 in April and May, a possible “loss of momentum,” according to a monetary policy report submitted to Congress in conjunction with Yellen’s appearance.
Yellen’s testimony will be followed by questions from lawmakers about monetary policy, the economy, regulatory matters and other issues.
The Fed has faced criticism from Congress over its handling of matters like a leak of sensitive information several years ago, and more recently was questioned about cybersecurity after the theft of $81 million from an account held by the central bank of Bangladesh at the New York Federal Reserve Bank.
The Fed under Yellen has begun nudging rates higher, but also has steadily downgraded its forecasts of the U.S. economy, delayed expected rate increases, and left investors perplexed about what’s influencing its decisions.
The economy is near full employment and inflation has shown signs of picking up, putting the economy close to meeting the Fed’s twin goals.
Yet Yellen and other policymakers remain tentative. Weak global demand and the impact of a strong dollar have hurt U.S. manufacturing, and the May jobs report raised the specter of slowing employment growth.
Some officials have openly worried that the United States is being held back by a variety of global and domestic issues that will mean subpar growth and abnormally low interest rates for years to come.
Alongside chronic challenges like low productivity and an aging population, the “Brexit” referendum on Thursday is considered a possible flashpoint for the global economy if Britain decides to cut its ties to the EU.
A vote to exit the EU, “could have significant economic repercussions,” a prospect that in part prompted the Fed to hold off on a rate increase at its policy meeting last week, Yellen said.
Here are the highlights from Yellen’s address:
The following are highlights of Federal Reserve Chair Janet Yellen’s semiannual testimony on the U.S. economy and monetary policy as prepared for delivery on Tuesday to the Senate Banking Committee.
Yellen on the Federal Funds Rate:
“The FOMC expects that with gradual increases in the federal funds rate, economic activity will continue to expand at a moderate pace and labor market indicators will strengthen further.”
“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective.”
Yellen on the upcoming Brexit vote:
“A U.K. vote to exit the European Union could have significant economic repercussions. For all of these reasons, the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor markets, and inflation.”
Yellen on the labour market:
“However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate.”
Yellen on wages and job growth:
“There are some tentative signs that wage growth may finally be picking up. That said, we will be watching the job market carefully to see whether the recent slowing in employment growth is transitory, as we believe it is.”
Yellen on inflation:
“And while inflation has continued to run below our 2 percent objective, the Federal Open Market Committee (FOMC) expects inflation to rise to that level over the medium term.”
“As the transitory influences holding down inflation fade and the labor market strengthens further, the Committee expects inflation to rise to 2 percent over the medium term. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal.”
YELLEN ON ECONOMIC GROWTH INDICATORS:
“The available indicators point to a noticeable step-up in GDP growth in the second quarter. In particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth. And housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.”
“The recent pickup in household spending, together with underlying conditions that are favorable for growth, lead me to be optimistic that we will see further improvements in the labor market and the economy more broadly over the next few years.”
“The latest readings on the labor market and the weak pace of investment illustrate one downside risk — that domestic demand might falter.”
“In addition, although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.”
Yellen on China =:
“China continues to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth.”