By Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) - Tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the Federal Reserve would need to reverse the rate tightening cycle it began in December, Fed Chair Janet Yellen told U.S. lawmakers on Wednesday.
Global risks have intensified and could slow the U.S. economy, but "I don't expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates," Yellen said. "There is always a risk of a recession...and global financial developments could produce a slowing in the economy."
But "I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don't think it is going to be necessary to cut rates."
Yellen's comments are her first in public since the Fed raised rates in December and ended a seven-year stint where borrowing costs were held near zero.
In prepared remarks to the House Committee on Financial Services she acknowledged a series of global problems that have grown worse since then. Financial conditions overall have tightened, driven by falling stock prices, uncertainty over China and a global reassessment of credit risk that could throw the U.S. economy off track.
Some of those problems threaten to become self re-enforcing, with weak growth in major manufacturers like China and oversupply on commodity markets rattling the world's oil and mineral exporters. A broad sense of a world slowdown, in turn, and uncertainty about the depth of China's problems, could further tighten financial conditions for U.S. businesses and households.
"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said in her semi-annual appearance before lawmakers.
But in her prepared remarks and answers to lawmakers' questions, Yellen emphasized a steady-as-she-goes account of Fed policy, with good reason to believe the United States economy will continue to grow and allow the Fed to pursue its plan of "gradual" adjustments to monetary policy.
"Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending," Yellen said. And with other central banks maintaining loose monetary policy, "global economic growth should pick up over time."
The Fed "expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen," Yellen said.
Investors have all but ruled out a rate hike for the rest of the year, but Yellen's comments kept the central bank's options open. U.S. stocks were mostly higher on Wednesday and the dollar crept up as well.
"Yellen seems to be maintaining her faith in the outlook of the U.S. economy and still anticipates to raise rates," said Joe Manimbo, senior market analyst with Western Union Business Solutions.
A Fed report accompanying Yellen's testimony said the U.S. financial sector "has been resilient" to stress from the oil downturn and weakening corporate debt markets around the world, with "limited" exposure to those problems among large U.S. banks. But "if conditions in these sectors worsen...wider stresses could emerge."
(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Dion Rabouin; Editing by Andrea Ricci)
