However, tightening financial conditions driven by falling stock prices, uncertainty over China and a global reassessment of credit risk could throw the USA economy off track from an otherwise solid course, Yellen said in a prepared testimony to Congress.
Advertisement
“These developments, if they persist, could weigh on the outlook for economic activity and the labour market, although declines in longer-term interest rates and oil prices provide some offset”.
Yellen is expected to acknowledge the US economy faces a number of global threats that could derail growth and compel the Fed to slow the pace of future interest rate hikes.
Yellen reiterated that the Fed expects to have “gradual” interest rate increases.
Geoffrey Yu, strategist at UBS Wealth Management, discusses what he expects to hear from Fed Chair Janet Yellen and markets pricing-in possible timing for a Fed rate hike.
Yellen noted that it would be disruptive to the economy to remove the IOER, adding that as short-term rates rise, banks are also paying more to gain funding they rely on.
“Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies overseas”, she said.
Crude oil prices were also green, after a brutal sell-off on Tuesday that took futures to the lowest levels in about three weeks.
Yellen responded that the Fed has “an array of tools” – prompting Luetkemeyer to interject that short-term interest rates are already extremely low.
Stocks were relatively quiet as investors digested what Yellen said: the Dow rose 60 points Wednesday afternoon as the testimony wore on. However, Yellen said it was “worth noting” that market expectations of inflation have declined recently, though other measures have remained more stable. The fact that the Fed may be slow to move and not be quite as activist is not a bad thing per se, but needs to be understood in the context of how the markets will behave. Yellen is scheduled to deliver the central bank’s semiannual monetary policy report to the House Financial Services Committee on Wednesday and Senate Banking Committee on Thursday.
To satisfy investors, analysts say that the Fed chairman will need to assure markets that the U.S. economy is strong, but not strong enough to necessitate further rate rises.
FED SPEAK: Federal Reserve Chair Janet Yellen begins two days of congressional testimony Wednesday that is keenly awaited by markets.
The benchmark yield has dropped more than 50 basis points since the start of the year amid a global flight to safety that has boosted demand for safe assets like government bonds.
At the same time, Yellen insisted that the labor market has continued to improve – the jobless rate fell below 5 percent in May for the first time in eight years – and the economy is still poised for moderate growth.
Advertisement
After all, since the Fed hiked its key interest rate in December, the stock market has been in turmoil, with averages selling off significantly. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries.
