Fed's Yellen Notes Uncertainties; Reiterates 'Gradual' Pace for Rate Rises

Posted on 03/09/2017 10:26 AM

Testimony echoes themes from post-FOMC remarks

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An uncertain economic outlook continues to be a theme for the US Federal Reserve, with several potential pitfalls and headwinds outlined by Fed Chairwoman Janet Yellen in her prepared remarks on monetary policy delivered to the Senate Banking Committee. Yellen embarked today on two days of testimony to present the semiannual monetary policy report to Congress. 

"Considerable uncertainty about the economic outlook remains," Yellen stated. "The latest readings on the labor market and the weak pace of investment illustrate one downside risk – that that domestic demand might falter. In addition, although I am optimistic about the longer-run prospects for the US 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."

Global concerns still in place. While the concerns over China appear to have "eased" from earlier this year, Yellen noted, "China continues to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth."

Brexit risk. In the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, Yellen noted, "investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions."

Given those uncertainties, "the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor markets, and inflation, she said.

Where to for the Fed: Proceed with caution. Below-target inflation and mixed readings on the US economy are two key factors that are keeping the Fed "proceeding cautiously" relative to raising the range on the Fed funds rate, Yellen said. That process 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% objective."

Further, the Fed funds rate still being near its "effective lower bound" also argues for the cautious approach, Yellen said. "If inflation were to remain persistently low or the labor market were to weaken, the Committee would have only limited room to reduce the target range for the federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2%, the FOMC could readily increase the target range for the federal funds rate."

Gradual still is the call re: rate increases: Given the expectation by the Fed that economic conditions will improve at a rate that warrants only "gradual" increases in the Fed funds rate, Yellen said, "the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run because headwinds – which include restraint on US economic activity from economic and financial developments abroad, subdued household formation, and meager productivity growth – mean that the interest rate needed to keep the economy operating near its potential is low by historical standards."

Fed views on rates. The June projections by Fed members, Yellen observed, "anticipate that values for the federal funds rate of less than 1% at the end of this year and less than 2% at the end of next year will be consistent with their assessment of appropriate monetary policy."

Uncertainty equals no preset rate-rise course: "The actual path of the federal funds rate will depend on economic and financial developments and their implications for the outlook and associated risks," Yellen stated. "Stronger growth or a more rapid increase in inflation than the Committee currently anticipates would likely make it appropriate to raise the federal funds rate more quickly. Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time." 

Link to testimony.

Comments: Yellen did not stray much at all from the post-meeting press conference observations she offered relative to the Fed's policy position after the June FOMC session. And that reflects that little really has changed in just six days. So the focus will be on how she responds to lawmaker questions. But unless they can somehow "catch" Yellen in a way that reporters were not able to in the post-meeting press conference, there will likely be lots of copy but perhaps not a lot of "news" or "new revelations" from Yellen who has shown she is not easily rattled, no matter who is asking the questions.


NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.




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