NEW YORK, N.Y. – Federal Reserve Chair Janet Yellen said Tuesday that the Fed still envisions only a gradual pace of interest rate increases in light of global pressures that could affect the U.S. economy.
Yellen didn’t specify a timetable for further hikes to follow the Fed’s rate increase in December from record lows. She said risks to the United States appear limited but cautioned that that assessment is subject to “considerable uncertainty.”
Speaking to the Economic Club of New York, Yellen said the central bank is monitoring a global economic slump, sharply lower oil prices and stock market turbulence, which she said have hurt some U.S. consumers and key sectors such as manufacturing.
Singling out China — the world’s second-largest economy, after the United States — Yellen noted widespread uncertainty over how well Beijing will manage a delicate slowdown in coming years.
She said that because foreign economic growth seems to have further weakened this year, the Fed will “proceed cautiously” in raising rates.
In light of her comments, most economists expect no hike at the Fed’s next policy meeting — April 26-27 — despite remarks last week from other Fed officials that had raised the possibility of a rate increase then.
“Despite a growing chorus of calls from even centrist-leaning officials to resume raising policy rates, Chair Yellen stuck to the dovish script of the March meeting statement,” when the Fed expressed concerns about the global economy and kept rates unchanged, said Sal Guatieri, senior economist at BMO Capital Markets.
Investors welcomed Yellen’s message that the Fed would move slowly in raising rates. Major U.S. stock indexes turned higher after she began her remarks, reversing an early loss, and bond yields dipped.
Yellen noted that the U.S. job market and housing recovery have lifted the economy close to full health despite the risks that remain. She observed that the economy has benefited from low long-term U.S. borrowing rates. Those rates have been held down by money flowing into U.S. bonds from investors, who have scaled back their expectations for the number of Fed rate hikes this year from four to two at most.
The Fed chair said that while stock prices have rebounded to roughly where they were when 2016 began, “in other respects economic and financial conditions remain less favourable than they did” in December, when the Fed raised its key rate modestly after keeping it near zero since 2008, when the financial crisis erupted.
Yellen cautioned that the Fed’s expectations for rates remain subject to revision to reflect any significant changes in the U.S. or international economic outlook.
“I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty,” she said.
She said she still thought inflation will rise gradually over the next two to three years to the Fed’s target of 2 per cent annual increases in prices. Inflation has been running below this level for nearly four years. But Yellen warned that if oil prices began falling again, it could have “adverse spillover effects to the rest of the global economy.”
Such expressions of concern about risks, which were sprinkled throughout her speech, help explain why Yellen seems inclined to keep rates unchanged in the near future.
Responding to a question after her speech, Yellen said the Fed foresees U.S. worker productivity, which has been historically low in recent years, eventually rising but says that assessment is “a source of huge uncertainty.” Productivity — the average output produced per hour of work — is needed to boost living standards.
When the Fed met two weeks ago, it signalled the likelihood of just two rate increases this year — half the number that Fed officials had envisioned in December. As a result, most economists concluded that no rate increase would likely occur before June.
But comments last week from several of the Fed’s regional bank presidents had raised the possibility that the central bank would decide to raise rates in April. One of them, Dennis Lockhart of the Fed’s Atlanta regional bank, said in a speech that he thought the strength of the most recent U.S. economic data could justify a rate increase as early as April. The views expressed by Lockhart, who is regarded as a centrist in his approach to interest rates, was echoed by some other Fed regional bank presidents.
Whatever decision the Fed does make in April will hinge on its view of the economy’s durability. In the past week, some reports have produced weaker-than-expected readings, including a sharp drop in orders for long-lasting manufactured goods and tepid consumer spending. Those reports have led some economists to downgrade their forecasts for growth in the current January-March quarter from a 2 per cent annual rate to a lacklustre 1 per cent.
The consumer spending report also showed that the Fed’s preferred inflation gauge is still signalling that inflation remains well below its target level. For the 12 months that ended in February, inflation rose just 1 per cent. “Core” inflation, which excludes the volatile items of food and energy, increased 1.7 per cent.
Crutsinger reported from Washington.