US Federal Reserve chair Janet Yellen said she did not think a downturn bad enough to produce a cut in its interest rates was likely but added that the Fed was studying the possibility of negative rates.
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Yellen’s testimony marked the first of two days of testimony she will give to Congress. Her appearance marked her first public comments since December, when the Fed raised rates for the first time in almost a decade.
“In the spirit of prudent planning, in light of European experience, we will look at, we should look at”, Yellen explained.
Central banks in Europe and Japan have already adopted negative interest rates in response to slowdown concerns with Sweden – already at below zero – cutting further on Thursday to minus 0.5%.
But some experts argue that global central banks are adding fuel to the fire, amplifying the gloomy outlook and spooking investors with unorthodox policies like negative interest rates.
She also singled out China’s confusing policy on its yuan currency as stirring more turbulence in global markets including those for vital commodities, also threatening USA growth.
With her testimony on Wednesday, Yellen joined Fed Vice Chairman Stanley Fischer and other central bank officials, who implied that it will take some time to assess the impact of the recent market turmoil on the health of the USA economy. It was only after the start of the year that trading turned turbulent in response to a depreciation of China’s currency and a dive in oil prices, she said. “It’s not what I think is the most likely scenario”, she said. Even the Federal Reserve has signaled negative rates could happen in the US, if needed.
Republicans and Democrats sparred with Yellen over the Fed’s ability to improve the economy, but the tone of the hearing was much less confrontational than her appearance Wednesday before the House Financial Services Committee.
Yellen stressed that any Fed decision to employ negative rates in the United States was not imminent. That could, in turn, slow the pace of Fed interest rate hikes, she said, but investors appear more concerned about the outlook for growth.
The 10-year Treasury note yield dropped to 1.53 percent, its lowest since September 2012, while the 30-year bond yield hit 2.38 percent, its lowest in a year.
Yellen and the Fed also preach a policy called “data dependent”, meaning they base their strategy on the flow of incoming economic data.
The December fed funds futures contract shot to a record high, implying an end-of-year fed funds effective rate of 0.35 percent, compared with 0.38 percent on Wednesday.
“We haven’t finished that evaluation”.
Dr Yellen said the Fed is looking at potential changes to its bank stress test that would make them tougher for the very largest banks but potentially easier for those with close to $US50 billion in assets.
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“As long as we can avoid a recession, this correction will probably work itself out, and we’ll have the opportunity to bounce back”, said Kelly Bogdanov, portfolio analyst at RBC Wealth Management in San Francisco.
