Sat, Feb 13, 2016 page6

• Yellen sticks to Fed policy despite global pressures

  NEGATIVE RATES? While the Fed had decided against using such rates in 2010, it may revisit the issue now that other central banks are using them, Janet Yellen said

  • AP, WASHINGTON
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  US Federal Reserve Chair Janet Yellen on Thursday said that global economic pressures pose risks to the US economy, but that it is too soon to know whether those risks are severe enough to alter the central bank’s interest-rate policies.

  Yellen said the Fed would determine at its meeting next month how much economic weakness and falling markets around the world have hamstrung US growth. And for a second day, Yellen was asked about the possibility that the Fed would use negative interest rates as a way to give the economy more support.

  She repeated that the Fed had studied the prospect of deploying negative rates in 2010, but had decided then not to use them to try to boost the economy.

  

  Traders work on the floor of the New York Stock Exchange as US Federal Reserve Chair Janet Yellen is seen speaking on television on Thursday in New York.

  Photo: Bloomberg

  However, she said the Fed thought it should study the issue again now that other central banks, including in Europe and Japan, are using negative rates to try to step up lending and energize growth.

  “In light of the experience of European countries and others that have gone to negative rates, 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, she said.

  Yellen stressed that any Fed decision to employ negative rates in the US was not imminent. She said that while the financial landscape has darkened since the Fed’s rate increase in December last year, reversing course from gradually raising rates to cutting rates is “not what I consider the most likely scenario.”

  The Fed chair acknowledged that the central bank has been surprised by how much energy prices have dropped and the US dollar has risen in value since the middle of 2014.

  “We have been surprised in part by those developments, and they have played a significant role in holding down inflation,” Yellen said.

  The Fed has tied further rate increases to more evidence that it is moving toward achieving its goal of having inflation rise at a rate of 2 percent annually. For nearly four years, the Fed has fallen well short of that target, in part because of sinking energy prices and a stronger US dollar, which lowers the cost of imported goods.

  Yellen’s testimony to the US Senate Banking Committee followed an appearance on Wednesday before the House of Representatives’ Financial Services Committee. On both days, Yellen cautioned that global pressures could depress the economy’s growth and slow the pace of Fed rate hikes.

  On Thursday, US Senator Charles Schumer challenged Yellen on the pace of future rate hikes. Schumer argued that pushing ahead too quickly with more rate hikes would be a mistake given that wage growth is just now showing signs of picking up. The senator said another concern was that rate increases could further boost the greenback’s value at a time when a strong dollar has been depressing the exports of US manufacturers.

  “Further movement by the Fed to raise rates could snuff out the embers of wage growth,” Schumer said. “I am less worried about inflation and more worried about slow wage growth.”

  Yellen said in December that when the Fed raised its key rate by a quarter-point after it had remained at a record-low near zero for seven years, there were signs that wages were improving.

  “We expect that wages will move up at a somewhat faster pace” now that the unemployment rate has fallen significantly from levels reached during the recession, she said.

  On other issues, Yellen said it was premature to say whether the risks of a recession have risen in light of recent economic weakness.

  “We have seen global economic and financial developments that may well affect the US outlook,” she said. “I think it is premature at this point to decide exactly what the consequences ... will be.”
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