U.S. Fed Chief Speaks Softly But Carries a Big Warning

U.S. Federal Reserve Chief Janet Yellen speaks in a drab monotone that threatens to lull even the most caffeinated listener to sleep. But, speaking to the House Financial Services Committee Wednesday morning, her words served as a wake-up call that the U.S. economy faces looming threats from continuing low oil prices to China’s economic slowdown.  

In remarks to lawmakers accompanying her biannual report to Congress, Yellen said the U.S. economy continued to grow despite a slowdown at the end of last year. She also said the labor market is improving. But she warned that conditions in the United States are not as healthy as they were at the start of 2015.

Equity markets around the world have since tumbled on concerns about global growth. Last fall, the International Monetary Fund cut its growth projections in the U.S. for 2016 from 3 percent to 2.8 percent. And a strong dollar has made it more difficult for U.S. exporters to sell their goods abroad.

“Financial conditions in the United States have recently become less supportive of growth,” Yellen said in prepared testimony. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.”

The Fed chief’s comments are always closely tracked by investors and policymakers around the world. The most likely take away from her remarks Wednesday is increased doubt about whether the Fed Open Market Committee would raise rates again in March. Right now, futures markets anticipate another rate hike next month.

As she has in the past, Yellen placed part of the blame for the slower than expected growth in the U.S. on China, which is also in a period of lagging growth. Beijing had been a beacon of positivity during the Great Recession. Now, however, the IMF predicts growth there would continue to slow, from 6.8 percent in 2015 to 6.3 percent this year. The benchmark Shanghai Composite Index lost nearly 40 percent of its value last summer, and continues to lag. Exports out of China were down 1.4 percent in December, continuing a downward trend seen throughout the fall.  

Last year, she delayed an interest rate increase due to concerns about Beijing’s management of the world’s second largest economy. She finally pulled the trigger in December, increasing the cost of borrowing from the U.S. central bank from near zero percent to a range between 0.25 percent and 0.5 percent. But her concerns persist.

“Declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy,” Yellen said. “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 didn’t address a possible new rate hike in her prepared remarks. But when Rep. Carolyn Maloney (D-NY.) asked whether historically low oil prices, the slowdown in China, and an equity rout to start the year would change the Fed’s plans, Yellen made clear that she had not yet concluded a rate hike was imminent.

“We are watching very carefully what’s happening in global financial markets,” Yellen said. “Monetary policy is not on a preset course.”

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