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Fed Chief Yellen: Weak Economies Abroad Threaten U.S. Recovery

Markets around the world reacted positively to Fed chief Janet Yellen's pledge to keep interest rates low for the next few months. But a rate hike could be coming in the fall.

By David Francis

February 24, 2015, 3:19 PM

The U.S. economy is steadily improving, but weak economies around the world are forcing the Federal Reserve to hold off on raising interest rates, Fed chief Janet Yellen told a Senate panel in remarks closely watched -- and cheered -- by investors at home and abroad.

Yellen repeatedly said the Fed would have “patience” when it considered raising interest rates, which are at historic lows. That came as a relief to Wall Street, where both the Dow Jones industrial average and the S&P 500 reached all-time highs Tuesday, Feb. 24, because cheap borrowing costs make it easier for companies to invest in their businesses and grow. She said the Federal Open Market Committee would consider raising rates on “on a meeting-by-meeting basis,” more code to investors not to expect a change in the next few months.

Yellen testified for more than two hours Tuesday morning in a bland, flat tone. She calmly engaged critics like Sen. Rand Paul (R-Ky.), Sen. Richard Shelby (R-Ala.), and Sen. Elizabeth Warren (D-Mass.) with disagreements over a proposed audit of the Fed and broader U.S. monetary policy, never escalating beyond a measured back-and-forth over complicated and sometimes arcane aspects of the broader U.S. economy.

But her real audience was Wall Street, which was unsure if a rate hike was in the works, and it seems traders came away impressed. Most analysts weren’t expecting a rate hike until mid-year, and Yellen promised them more than a few months of cheap money. The Federal Reserve set the targeted interest rate for federal bonds at 0 to 0.25 percent. According to data compiled by CME Group FedWatch, short-term rate futures contracts now indicate the Fed will raise rates in October 2015 as opposed to September 2015, the target date before her testimony. It would be the first federal interest rate hike since 2006.

Low U.S. interest rates have injected much-needed cash into the global economy. This money has fueled America’s recovery because the Federal Reserve is essentially allowing businesses to borrow for free, giving companies the chance to invest without a significant risk of defaulting on their loans. European companies, like U.S. firms, have also been able to access cheap American debt through the purchase of low-interest U.S. Treasury bonds, giving them a much-needed boost.

The Fed chief’s testimony also garnered a positive reaction in Europe. Britain’s benchmark FTSE 100 index closed at an all-time high Tuesday after Yellen’s testimony and on the news of Greece’s deal to pay down its debt. Still, Yellen cautioned that many foreign economies are still wobbly and that a continued slowdown abroad could have a spillover effect at home. “Foreign economic developments,” she said diplomatically, “could pose risks to the outlook for U.S. economic growth.”

Yellen is set to testify Wednesday before the House Financial Services Committee. If her comments Tuesday are any indication, the Street is likely to be pleased with what she’ll have to say — and so will many investors around the globe.

Photo credit: Saul Loeb/AFP

*Correction, Feb. 25, 2015: Sen. Rand Paul represents the U.S. state of Kentucky. An earlier version of this article mistakenly said he represents Indiana.