US Federal Reserve Chair Janet Yellen on Tuesday expressed confidence in US economic growth, but stuck to a dovish stance on monetary policy, saying the Fed still had to keep its eye on international economic and financial frailty.
With markets on edge over when the Fed would next raise interest rates, which would increase the cost of money for borrowers worldwide, Yellen signaled clearly that was not likely to come before June and that, when the US central bank does tighten policy, it would be slow and gradual.
“The US economy has proven remarkably resilient,” she told the Economic Club of New York, in her first public remarks since the Fed took a surprisingly dovish stance on monetary policy in its meeting this month.
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Job creation remains strong, and other signs of growth firm, even as US manufacturing industry has been hit by the strong US dollar and the sharp contraction in the oil and gas industry, she said.
However, even if the US economy continues to grow at a moderate pace, the Fed has to pay heed to “broader concerns about global financial developments,” including oil prices and the overall pace of growth, as it weighs tightening monetary policy.
Yellen also rejected arguments, including from some Fed officials, that inflation has increased to the point that the policy-setting Federal Open Market Committee (FOMC) needs to raise rates sooner rather than later.
She was still not convinced that the signs of a permanent uptick in consumer prices were already evident.
“It is too early to tell if this recent faster pace will prove durable,” she said.
Analysts said her comments all but ended any chance of another rate rise at next month’s policy meeting, while expectations for a June move were also lower.
The news put a fire under stock markets, with all three main indices in New York rallying and the gains continuing in Asia.
Hong Kong jumped 1.6 percent in the afternoon and Shanghai had surged 2.8 percent by the close. Sydney added 0.1 percent, Singapore rallied 1.6 percent in late trade and Seoul closed 0.4 percent higher.
There were also healthy gains in Taipei, Wellington, Manila and Jakarta.
Broadly speaking, Yellen said the Fed is holding to its forecasts for moderate US growth and inflation heading to the Fed’s 2 percent goal over the medium term, the same view it held in December last year, when the FOMC decided to raise the rock-bottom federal funds rate for the first time in more than nine years.
“The baseline economic outlook that the committee saw both in December and March looks quite similar,” Yellen said. “I would say the major thing that’s changed between December and March that affects the baseline outlook is a slightly weaker projected pace of global growth.”
She made clear that she felt the FOMC has the room to further watch domestic and global trends.
“Given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy,” she said.
Enumerating her worries, Yellen pointed specifically to uncertainty about China and how its troubles and its broader economic transition affects global growth.
“There is much uncertainty, however, about how smoothly this transition will proceed, and about the policy framework in place to manage any financial disruptions that might accompany it,” she said of China.
She also said that the sustained collapse of the market for oil and other key commodities is also keeping a cloud over the global economy, even as cheaper prices benefit consumers and manufacturers.
Another sharp fall in oil prices would have an adverse impact on the world economy, she said.
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