“We’ve not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching”, she said.
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“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”, Yellen said.
“She is holding to her guns”, said Ward McCarthy, chief financial economist at Jefferies in NY. “It could have an effect on the pace at which they normalize rates, but they are still committed to normalizing rates”.
Head of rates strategy at Mizuho International, Peter Chatwell expects price action to remain weak on Wednesday as a lot of uncertainty still remains around what Yellen might say.
Yellen said that the collapse of the U.S. stock markets, rising interest rates to less creditworthy borrowers and a strengthening dollar have resulted in financial conditions less favorable to growth.
In prepared statements to Congress, Yellen outlined risk factors such as dropping commodity prices and the correction in China’s economy as reasons to continue to monitor internal and external conditions ahead of another interest rate hike. Australia’s S&P/ASX 200 shed 1.2 per cent. Markets were closed in China, Taiwan, Hong Kong and South Korea for Lunar New Year holidays. The yield on the 10-year Treasury held rose to 1.74 per cent from 1.73 per cent late Tuesday.
Responding later to a question from Rep. Carolyn Maloney, D-N.Y., Yellen said she does not expect that the FOMC is going to be in a situation any time soon where it would need to look at cutting rates.
The Fed’s decision to raise interest rates in December was meant to signal the central bank’s confidence in the strength of the USA economy. Most recently, bank stocks took a pounding as investors flagged the small but potentially damaging portion of outstanding loans made to energy companies struggling with low oil prices.
“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. However, once oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wane, and as the labor market strengthens further, inflation is expected to rise gradually to 2 percent over the medium term. “The benefit of a rule-based system is it’s systematic and understandable”, Yellen said.
The Dow Jones was up 0.4 per cent to 16,077; the S&P 500 was up 0.59 per cent, and the Nasdaq was up 0.89 per cent to 4,307.
BONDS AND CURRENCIES: Bond prices were little changed. Yellen is expected to explain why the rate hike was important and also lay the ground for further rate increases.
On negative rates, Yellen noted that she was not aware of any legal limitations to implementing this, and that the Fed had not investigated this.
Fears of a global and US economic slowdown, along with oil’s precipitous slide, have already dampened the market’s expectations for a hike in coming months.
Her prepared remarks released earlier showed that the Fed is watching developments in markets and the economy very closely. The Fed’s committee meets next in mid-March.
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Despite gloom in financial markets, data on the us economy have included plenty of positive news, especially on the labor front.
