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Business

Fed: No need to lower rates

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2 years ago

But further hikes not imminent, says Yellen.
U.S. Federal Reserve Board Chair Janet Yellen testifies at the House Financial Services Committee in Washington, Wednesday.

BY MARTIN CRUTSINGER

The Associated Press

WASHINGTON – The widening fallout from global economic woes may compel the Federal Reserve to slow the pace of future rate hikes, but it doesn’t see any immediate need to reverse course and lower rates, Chair 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.

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.”

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

Her testimony Wednesday included her most extensive comments on the situation in China. The data so far does 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 a meager 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,” 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 U.S. consumers.

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