The Cable

The Fed Is Getting More Pessimistic About the Direction of the Global Economy

U.S. Fed chief Janet Yellen is worried that slowdowns in China, Japan and the EU could spill into the U.S. economy.

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U.S. Federal Reserve Chair Janet Yellen insists the U.S. economy is healthy, and data from low unemployment to wage increases back her up. But she’s not yet ready to write off possible spillover from a global slowdown into the United States.

Citing a “slower projected path for growth in the global economy,” Yellen announced Wednesday that interest rates would remain at .25 percent, where she set them in December. She said the world’s slowdown has “led to increased market volatility” in U.S. financial markets and on the demand for American goods. This, she said, has caused a “slight downgrading of U.S. economic growth this year.”

“Global economic and financial developments continues to pose risks,” Yellen said following a two-day meeting of the Fed’s Open Market Committee. “Economic growth abroad appears to be running at a somewhat softer pace than previously expected.”

American “business investment has been weak. Net exports also remain soft as a consequence of subdued global growth,” she added.

Yellen also said the Fed would hold off on four potential interest rates increases this year because of these “headwinds” to U.S. growth. Now, she and her colleagues on the committee plan to only increase them twice in 2016.

This was unexpected. Nearly no one thought she would raise interest rates Wednesday, as she did last last year for the first time since 2006. But the committee’s decision to scrap four planned rate hikes is an indication it doesn’t think the American economy is healthy enough to continue to expand without keeping borrowing costs extremely low.

Yellen pointed out red flags flying around the world. As she has in the past, she expressed worries about the Chinese slowdown. She cited negative economic growth in Japan, something that came as a “surprise.” On the European Union, she said, “recent indicators suggest slightly weaker growth.”

Still, she said the United States had showed itself capable of taking a punch. “The U.S. economy has been very resilient in recent months in the face of shocks.” But minutes later, she acknowledged, “Global developments do pose some downside risks.”

Photo Credit: Saul Loeb/Getty Images

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