Federal Reserve Chairwoman Janet L. Yellen indicated Wednesday that the Federal Reserve could delay further raising a key interest rate while the U.S. economy faces increased pressure from slower global growth and roiling financial markets.
Despite those risks, Yellen said the U.S. appeared to be weathering the turmoil. She said she does not believe the Fed will be forced to reverse course and reduce the benchmark short-term interest rate.
“We've not yet seen a sharp drop-off in growth either globally or in the United States, but we certainly recognize that global market developments bear close watching,” Yellen told members of the House Financial Services Committee.
If economic conditions worsen, she said the Fed is prepared to act, noting that “monetary policy is not on a pre-set course.” She even suggested the Fed would consider negative interest rates, an extraordinary step taken recently by the Bank of Japan and the European Central Bank to try to stimulate economic growth.
Yellen said the Fed hadn't looked into the legality of such a move, which was briefly considered in 2010.
In her much-anticipated first public comments in eight weeks, Yellen tried to calm financial markets while keeping all options on the table.
She appeared to accomplish the task: The Dow Jones industrial average and other major stock indexes rose after her comments, although they lost most of those gains by the time the markets closed.
“It seems she succeeded in calming a very jittery market, but there's no guarantee this lesser anxiety will last,” said John Lonski, chief economist at Moody's Capital Markets Research Group.
Financial markets in the U.S. and abroad began tumbling at the start of the year, mirroring a steep drop in oil prices, and have been roiled ever since.
On top of that, new data show that U.S. economic growth slowed at the end of last year as the economies of China and other nations have faltered.
“Foreign economic developments, in particular, pose risks to U.S. economic growth,” Yellen said. But she tried to allay concerns by saying that “recent economic indicators do not suggest a sharp slowdown in Chinese growth.”
Still, she noted that uncertainty about the global economy triggered “increased volatility” in financial markets and “exacerbated concerns” about worldwide growth. Yellen said she and other members of the policymaking Federal Open Market Committee are “closely monitoring global economic and financial developments” and assessing what it means for the U.S.
It was clear that Yellen wanted to keep her options open and not get boxed in at a time when experts are mixed about the Fed's best course of action and whether rates should be cut or raised.
“She was in a no-win situation,” said Ryan Sweet, an analyst who covers the Fed for Moody's Analytics. “But she did a fairly good job in communicating the Fed is in a wait-and-see mode.”
Sweet sees the Fed boosting the short-term rate two or perhaps three times this year, although he doesn't predict any action until June.
In December, Fed officials nudged up the central bank's benchmark short-term interest rate for the first time in nearly a decade. The move came as the U.S. labor market wrapped up two years of robust growth and was seen as a validation of the strength of the recovery from the Great Recession.
The so-called federal funds rate was increased by 0.25 of a percentage point, and a majority of the Fed's 17 policymakers projected that the central bank would enact four similar small hikes this year.
Analysts had anticipated the first such hike would be in March. But the recent market turmoil, as well as the data showing U.S. growth slowed at the end of last year, has led to speculation that Fed policymakers will wait a little longer.
On Wednesday, Yellen offered no regret about the December rate hike, which some analysts have said contributed to the recent financial market troubles. Yellen said the move was justified by significant improvement in the labor market. Although U.S. financial conditions have worsened a bit since December, Yellen said Fed policymakers expect “that with gradual adjustments in the stance of monetary policy,” the economy will continue to grow moderately and the job market will continue to strengthen.
But she indicated the first of those gradual adjustments to the federal funds rate could be delayed depending on economic conditions and how they would affect the Fed's dual mandate to keep unemployment low and inflation stable. Fed officials next meet March 15 and 16.
She noted that “financial conditions in the United States have recently become less supportive of growth,” but Yellen was mostly upbeat about the state of the U.S. economy.
Still, Yellen faced bipartisan criticism — though much sharper from Republicans than Democrats — about sluggish economic growth and lagging wages for average workers.
About a dozen members of Fed Up, a coalition of labor, community and liberal activist groups, sat in the audience wearing green T-shirts that read, “Let our wages grow!” or “Whose recovery?” The coalition opposes raising interest rates until there is more improvement in the labor market.
Several members of the House Financial Services Committee pressed Yellen on unemployment rates for Latinos and blacks, which are much higher than the national average.
Yellen said the economy has improved significantly since the Great Recession and noted some recent “hopeful signs” of wage growth. But, she acknowledged, “there are many households that are suffering.”