The Fed “expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labour market indicators will continue to strengthen”, Yellen said.
Advertisement
The 2010 Fed staff analysis of negative rates suggested the central bank may only be able to reduce its benchmark deposit rate – the rate of interest on excess reserves, or IOER – to minus 0.35 percent before banks withdrew cash from the Fed and held it as currency instead. Investors have all but ruled out further interest rate hikes this year, after the Fed raised its fed funds rate for the first time in a decade in December.
After the Bank of Japan adopted the negative interest rate policy, there appears to be some clamor for it in the developed nations.
“In light of the experience of European countries and others that have gone to negative rates”, Yellen said, “we are taking a look at them again because we would want to be prepared in the event we needed” to nudge rates below zero to try to fuel borrowing and spending.
That failed to reassure investors hoping the Fed would signal that rate hikes are off the table for this year, said Katie Nixon, chief investment officer at Northern Trust Wealth Management. Yellen told lawmakers on Wednesday the Fed was assessing the potential impact from tighter lending standards and widening corporate credit spreads but said it was “premature” to decide whether the global shocks could change the interest rate outlook.
The Dow Jones industrial average fell 173 points, or 1.1 per cent, to 15,741 as of 10:02 a.m. Eastern Time. Dow member Chevron lost 2.7 percent, EOG Resources 4.0 percent and Halliburton 4.4 percent.
Futures augured sharp losses on Wall Street.
Stock traders work at the New York Stock Exchange, Thursday, Feb. 11, 2016, in New York.
“We have been surprised in part by those developments, and they have played a significant role in holding down inflation”, Yellen said.
What did financial markets think of the Fed move?
Crude oil prices plunged to new lows, with U.S. benchmark West Texas Intermediate closing in Asia trading at below $27 a barrel and Brent falling to under $31.
On Thursday, Yellen touched on numerous points she had made Wednesday in testifying to a House committee.
“The general message she meant to deliver is that additional rate hikes remain the base case, but markets have to stabilise before we see more”, said Cornerstone Macro analyst Roberto Perli. A record fall in Chinese official FX reserves at year-end led the government to depreciate the currency further in early January, encouraging even more outflows last month. They are assigning a slightly higher chance to a Fed rate cut this year than an increase, according to overnight-indexed swaps data compiled by Bloomberg. Plunging bond yields belie the Fed’s expectations that economic growth prospects are still in good shape, and that inflation is headed upward.
Advertisement
Panicky financial markets, global weakness and slumps in key US economic sectors have since clouded the outlook for more rate increases.
