Federal Reserve Chair Janet Yellen’s testimony before Congress on Wednesday highlighted global economic troubles and the recent selloff in stocks on Wall Street. Although she did not say specifically, Yellen’s speech has led most experts to agree that another interest rate increase by the Federal Reserve will be deferred.
As previously reported by the Inquisitr, the Fed last raised its benchmark interest rate in December for the first time in almost 10 years. Initially, the Fed had planned to slowly increase rates this year, but Yellen hinted today that weakness overseas and market volatility may change that plan.
Higher interest rates for certain borrowers, a strong dollar that hurts exports, and the recent fall in stocks have all contributed to current financial conditions that could ultimately discourage U.S. economic growth, according to Yellen. Other economic developments, particularly the financial slowdown in China, pose significant risks to growth as well.
“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices could provide some offset,” Yellen said in her semiannual monetary policy report to Congress.
In her testimony, Yellen made it clear that Fed policymakers are specifically aware of the possible implications on the U.S. economy from recent global economic and market turmoil.
As reported by USA Today, Yellen told lawmakers that the Fed has not seen enough deterioration in the global economy dramatic to justify the recent market selloff. However, the market troubles could negatively affect business confidence and growth, so the Fed will continue to carefully monitor any instability in international financial markets.
Yields on certain Treasury notes have fallen to very low levels, helping keep inflation at bay. Until a clear sign reveals that inflation may be gaining momentum, the Fed will remain cautious about any decisions to raise interest rates further.
Inflation has remained relatively low thanks to cheap oil prices and a strong dollar, which makes imports less expensive for U.S. consumers. Yet, Yellen noted that these conditions will inevitably change.
Meanwhile, job growth and rapid wage gains should continue to sustain the economy. In 2015, 2.7 million jobs were added and the unemployment rate fell to 4.9 percent, almost a whole percentage point in the last 12 months.
Despite some indicators showing a slowdown in growth, Yellen doesn’t see a reason to decrease interest rates.
“I do not expect (the Fed’s policymaking committee) is going to be in a situation where it is necessary to cut rates,” she said.
The Fed chief did not reveal any plans for the Fed’s March 15-16 meeting. They will have to weigh a rate change and recent market selloffs against plummeting oil prices, international economic troubles, and the likelihood of any future Fed rate increases.
Most financial experts do not see the Fed raising rates at next month’s meeting.
“There is enough focus on downside risks now to make a tightening move again that soon seem quite unlikely,” Jim O’Sullivan, the chief U.S. economist of High Frequency Economics, wrote in a note to clients.
Many investors are using Yellen’s testimony as an indication that a rate increase is very unlikely at all this year. The futures markets are speculating that there is less than a 20 percent chance of the Fed announcing a rate hike in 2016. However, many economists believe that is wishful thinking.
Even though the U.S. economy appeared weak in the fourth quarter, the number of jobs grew at a solid rate of 279,000 a month on average. Average wages grew steadily also, and the unemployment rate fell. These indicators, among others, suggest wages will continue to grow as the number of workers decline. This opens the possibility of the inflation rate rising, which could essentially force the Fed to increase rates.
European stock markets closed higher today after the Federal Reserve Chair’s speech. The FTSE 100 in Britain rose 0.7 percent to close at 5,672.30 and Germany’s DAX rose 1.6 percent to 9,017.29.
With Janet Yellen’s testimony to lawmakers and conflicting signals about the economy, it is likely the Fed is keeping their rate hike options open as new economic data and market developments are reviewed over the next few weeks.
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