Rate cut unlikely, Fed chief says

China woes, a downturn could slow increases, Yellen says

Federal Reserve Chairman Janet Yellen told lawmakers Wednesday that the Fed would adjust the pace of its interest rate increases to match the health of the economy.
Federal Reserve Chairman Janet Yellen told lawmakers Wednesday that the Fed would adjust the pace of its interest rate increases to match the health of the economy.

WASHINGTON -- The widening fallout from global economic woes might compel the Federal Reserve to slow the pace of future rate increases, but it doesn't see any immediate need to reverse course and lower rates, Chairman Janet Yellen told lawmakers Wednesday.

In her semiannual report to Congress, Yellen flagged China's weaker currency and economic outlook, which is rattling financial markets around the world. She also expressed concerns that rising borrowing rates and a strong dollar could weigh on U.S. growth and hiring, a reflection of this year's turmoil in financial markets.

Yet she also noted that strong hiring at the end of last year and signs of better wage growth could offset those drags.

The Fed still expects to raise interest rates gradually, but it is not on any preset course, Yellen said. It would likely move slower "if the economy were to disappoint."

Asked if the Fed might consider a rate cut if the economy did falter, Yellen ruled out the need for such a move right now.

"If it turned out to be necessary, [Fed policymakers] would do what is necessary to achieve the goals Congress has set for us," Yellen said.

The Fed has not yet determined whether it would be able to legally implement negative interest rates, she said.

The Bank of Japan and the European Central Bank recently cut their benchmark rates into negative territory in an attempt to provide more stimulus.

"I would say that remains a question that we still would need to investigate more thoroughly," Yellen said. "I am not aware of anything that would prevent us from doing it, but I'm saying we have not fully investigated the legal issues -- that still needs to be done."

A 2010 staff memo posted on the central bank's website late last month cast doubt on whether the law that authorized the Fed to pay interest on excess reserves also would grant it the authority to charge interest.

That could constrain the policy-setting Federal Open Market Committee's ability to take interest rates below zero in the future, a scenario that has gained increasing traction in financial markets over the past few weeks as mounting concerns over economic growth have raised questions about the tools available to central banks for battling the next downturn.

"I do not expect that the FOMC is going to be soon in the situation where it's necessary to cut rates," Yellen said during her testimony. The possibility of negative rates is "something that, in light of European experience, we will look at, we should look at -- not because we think there is any reason to use it, but to know what could potentially be available."

Yellen's testimony marked her first public comments since December, when the Fed raised rates for the first time in nearly a decade. She offered no major surprises and reiterated the Fed's confidence that the U.S. economy was on track for stronger growth and a rebound in inflation. At the same time, she acknowledged the weaker economic data reported since the start of the year and made it clear the Fed is nervous about the greater risks from abroad.

Her remarks stand in contrast to the Fed's statement eight weeks ago when it described economic risks as "balanced."

"She is holding to her guns," said Ward McCarthy, chief financial economist at Jefferies LLC in New York. "The financial market turmoil is not going to make them reverse course. It could have an effect on the pace at which they normalize rates, but they are still committed to normalizing rates."

After the Fed began raising rates at its December meeting, economists widely expected the central bank to continue to raise its benchmark rate gradually but steadily, most likely starting in March. But private economists have trimmed their expectation for four quarter-point increases this year down to perhaps only two, with the first not occurring until June at the earliest.

Her testimony Wednesday included her most extensive comments on the situation in China. The data so far do not suggest that the world's second-largest economy is undergoing a sharp slowdown, Yellen said. But she added that recent declines in the country's currency have intensified concerns about China's future economic prospects.

"This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth," Yellen said.

U.S. growth, as measured by the gross domestic product, slowed sharply in the fourth quarter of 2015, dropping to an annual rate of 0.7 percent. Yellen attributed the result to weakness in business stockpiling and export sales. But she noted that economy is being fueled by other sectors including home building and auto sales.

Yellen said that the sharp declines in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar had translated into financial conditions that are "less supportive of growth."

"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," she said.

Yellen said that the U.S. labor market remains solid, creating 150,000 jobs in January. That was enough to push the unemployment rate down to 4.9 percent.

Inflation, however, has continued to fall below the Fed's target of 2 percent annual price increases. The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.

Yellen said the central bank still believes that energy price declines and stronger dollar would fade in coming months. Inflation should also begin to move closer to 2 percent as a healthy labor market pushes up wages, she said. Worker pay has started to show its first significant gains since the recession ended 6½ years ago.

The Fed chief is required to appear before Congress twice a year. She is set to appear today before the Senate Banking Committee, led by Alabama Republican Richard Shelby.

Information for this article was contributed by Martin Crutsinger of The Associated Press, Matthew Boesler, Christopher Condon, Jana Randow and Craig Torres of Bloomberg News.

Business on 02/11/2016

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