Janet L Yellen, the Federal Reserve chairwoman, will say Wednesday she is not ready to conclude that turbulence in financial markets had infected the broader economy, and plans to reiterate that the Fed intends to raise its benchmark interest rate gradually as economic conditions improve.
According to prepared remarks for her biannual report to Congress, Yellen will testify that the economy continued to grow despite a slowdown in the final months of 2015, and the labour market continued to improve. But her assessment, while upbeat, was clouded by more caveats than her last public remarks in December. She noted a recent pullback by investors, particularly away from riskier borrowers, could yet undermine domestic growth.
"Financial conditions in the United States have recently become less supportive of growth," Yellen said in the testimony. "These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market."
The Fed raised short-term interest rates in December for the first time since the financial crisis. It started small, ending a seven-year period in which it held rates near zero with a rate increase to a range between 0.25 per cent and 0.5 per cent. Low rates are intended to encourage borrowing and risk-taking, and the Fed said it planned to gradually curtail those incentives as the economy gained strength.
Yellen did not specifically address the timing of future increases in the Fed's benchmark rate. Analysts began the year expecting the Fed to raise rates in March, but many now expect that the Fed will not act before June. Gauging the health of the economy has proved challenging.
Equity markets have tumbled on concerns about global growth. Interest rates have increased for riskier borrowers even as investors accept negative rates on a growing share of global debt, effectively paying to move their money into safe havens.
And the relative strength of the American economy has continued to drive up the dollar, rendering imports cheaper for American consumers but weighing on American exporters.
The question now confronting the Fed is whether the United States can continue to post exceptional, if modest, growth while much of the rest of the world struggles.
Yellen, in her remarks, highlighted the strength of the labour market, describing "solid improvement" over the last half-year. The unemployment rate fell to 4.9 per cent in January, down from 5.7 per cent in January 2015, and the economy added an average of 222,000 jobs per month over the previous year.
"Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending," Yellen said. The Fed has emphasised that it is focusing on job growth to determine how quickly to raise interest rates. Yellen and most members of her committee expect that continued job growth will lead to faster inflation, and they argue they must raise rates ahead of time to prevent inflation from rising too quickly.
US stocks gained after Yellen said conditions in the US would allow for "gradual" rate hikes, and as technology stocks rebounded. Yellen noted growth slowed "sharply" in the final months of 2105, but she reiterated the Fed's expectation that moderate growth will continue in 2016. "The committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the coming years and that labour market indicators will continue to strengthen," she said.
Inflation, however, remains sluggish. Yellen noted that prices rose by just 0.5 per cent during 2015, well below the 2 per cent annual pace the Fed regards as optimal. Moreover, expectations of future inflation have also been falling, a problem for the Fed because expectations tend to influence actual inflation.
A consumer survey conducted by the Federal Reserve Bank of New York reported Monday that expectations for annual inflation in three years had declined to the lowest level since the monthly survey was first conducted in 2013.
Yellen in her statement downplayed the importance of those declines, describing such measures of expectations as "reasonably stable."
©2016 The New York Times News Service
