Yellen: Global Uncertainty Justifies Slower Path of Rate Increases

Janet Yellen spoke at a news conference in Washington on March 16 after the Federal Reserve’s last policy meeting. The Fed’s interest-rate-setting committee next meets April 26-27. ENLARGE
Janet Yellen spoke at a news conference in Washington on March 16 after the Federal Reserve’s last policy meeting. The Fed’s interest-rate-setting committee next meets April 26-27. Photo: Bao Dandan/Xinhua via Zuma Press

Global economic and financial uncertainty, driven largely by the slowdown in China and the collapse in oil prices, has heightened the risk to the U.S. economy and justified a slower path of interest-rate increases, Federal Reserve Chairwoman Janet Yellen said Tuesday.

In remarks prepared for delivery at the Economic Club of New York, Ms. Yellen stuck to the same cautious tone that characterized her news conference following the Fed’s policy meeting two weeks ago, saying the central bank wanted to take a deliberate approach as it considers raising interest rates again.

“Given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Ms. Yellen said. She didn’t give details about the timing of the next rate increase.

The bouts of volatility that struck the financial system last summer and in the first few weeks of the year are signs that the threats from abroad are too significant to ignore, she said, and the performance of the U.S. economy since the beginning of the year has been “somewhat mixed.”

“Although the baseline outlook has changed little on balance since December, global developments pose ongoing risks,” she said. “These risks appear to have contributed to the financial market volatility witnessed both last summer and in recent months.”

On the positive side, the U.S. labor market continues to be robust, Ms. Yellen said, and consumer spending, the housing market and fiscal policy are all providing a lift.

But manufacturing and exports have been hit by the global turmoil and the resulting increase in the dollar. Ms. Yellen also repeated her concern that a recent pickup in inflation reflects temporary factors rather than a sustained uptick in economic activity.

“We have to take into account the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year,” she said.

And yet the U.S. economy has managed to weather those challenges so far because markets no longer expect the Fed to raise interest rates as much as previously anticipated, Ms. Yellen said.

The hits to the economy “have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending,” she said. “For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty.”

The Fed raised interest rates by a quarter percentage point in December after holding them near zero for seven years. At the time, Fed officials anticipated raising rates by another percentage point—likely spread over four rate increases—during the course of 2016.

But the wobbly global economic picture at the start of the year led markets to lower their expectations for Fed rate increases. In March, the Fed brought its own projections closer to those of market participants and lowered its median projection for interest-rate increases.

The Fed now expects to raise rates by a half percentage point over the course of 2016.

Ms. Yellen’s careful stance contrasts with recent statements from some Fed officials who have adopted a more upbeat tone since the March 15-16 meeting. Speaking in Singapore hours before Ms. Yellen was to deliver her speech, San Francisco Fed President John Williams delivered a more positive assessment of the U.S. and world economies.

“I don’t see a looming global crisis,” he said. In the U.S., inflation could hit the Fed’s target sooner than anticipated, he added. “If we see inflation continuing to consistently pick up, that would argue for a slightly steeper path for [monetary] policy,” he told reporters.

Those divergent messages suggest a split among Fed policy makers that could color the path of rate increases.

Write to David Harrison at [email protected]


WSJ.com: US Business

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