Fed not likely to reverse course on rates despite risks: Yellen

Tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the Federal Reserve will reverse the rate tightening cycle it began in December, Fed Chair Janet Yellen told U.S. lawmakers on Wednesday.

Reuters| Last Updated: Feb 11, 2016, 03:09 AM IST

Washington: Tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the Federal Reserve will reverse the rate tightening cycle it began in December, Fed Chair Janet Yellen told U.S. lawmakers on Wednesday.

Though risks have intensified and could slow the U.S. economy, "I don`t expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates," Yellen said. "There is always a risk of a recession...and global financial developments could produce a slowing in the economy."

But "I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don`t think it is going to be necessary to cut rates." Rather, she said she expected continued U.S. growth would allow the Fed to pursue its plan of "gradual" rate hikes.

Investors have all but ruled out a rate hike this year, but Yellen`s comments kept the central bank`s options open.

"The general message she intended 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.

U.S. stocks were higher, while both the dollar and bond yields rose slightly following Yellen`s comments.

They were her first since the news conference that followed the Fed`s December rate hike, allowing her to take stock of several weeks in which concerns have grown about slowing U.S. growth, a continued collapse in oil markets, a downturn in U.S. equities - and more than one suggestion that the Fed`s December move was a mistake.

Some of the most pointed questions from lawmakers on the House Committee on Financial Services, however, focussed less on the broad economics of the Fed`s rate hike and more on the tools the central bank has used to achieve it, particularly the payment to banks of interest on the roughly $2.5 trillion in reserves held at the Fed.

While Yellen said the interest payments are currently an indispensable part of the Fed`s arsenal, used as a way to prompt banks to raise their own short-term rates, the programme drew bipartisan criticism.

"This is going to the big banks, it is a subsidy...Please explain that," said California Democrat Maxine Waters, in critical comments that drew agreement from the committee`s chairman, Texas Republican Jeb Hensarling.

As in her other congressional appearances, Yellen sparred with Republicans over her opposition to using a stated monetary policy rule instead of the Fed`s discretion in setting interest rates, and fielded questions from Democrats about continued high unemployment among blacks and Hispanics.

"Our tools are not ones that can be targeted at particular groups," Yellen said, suggesting "job training, educational programs, programs that address barriers in the labour market, this is Congress` job to address."

The Fed regards the current 4.9 percent jobless rate as close to full employment, and Yellen said that could fall even further if the economy grows as expected.

In her prepared remarks, however, she acknowledged that a series of global problems have grown worse since the Fed lifted rates from near zero in December. Financial conditions overall have tightened, equity markets have fallen sharply, and doubts about China`s economy have grown more pronounced.

"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market," Yellen said in her semi-annual appearance before lawmakers.

But Yellen emphasized a steady-as-she-goes account of Fed policy, with good reason to believe the United States economy will continue to grow and allow the Fed to pursue its plan of gradual rate hikes.

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," she said.