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Yellen sticks to 2015 timeline for first US rate hike

Wednesday, July 15, 2015 - 21:15

[WASHINGTON] Federal Reserve Chair Janet Yellen stuck to her forecast for an increase in the Fed's key interest rate later this year on Wednesday, predicting a pickup in the US economy.

But Ms Yellen also warned that continued turbulence from Greece and China poses risks to the US growth picture.

In prepared testimony to Congress, Ms Yellen said that the labour market still showed "some" slack, suggesting accommodative monetary policy from the US central bank was still merited despite the unemployment rate falling to 5.3 per cent.

"Too many people are not searching for a job but would likely do so if the labour market was stronger," she said.

"And, although there are tentative signs that wage growth has picked up, it continues to be relatively subdued, consistent with other indications of slack." Even so, she said, prospects are for more improvement in the coming months that would support the Fed moving toward its first rate increase since 2006.

And, she allowed, the economy "also might snap back more quickly" than generally expected as the drag from the slow first half of the year dissipates.

The Fed has kept markets on edge for a raise in the federal funds rate, which has been locked extraordinarily at zero since the end of 2008 to pull the economy back from the Great Recession.

Since early last year, the first rate increase was flagged for around mid-2015. But with economic growth stalling in the first quarter - mostly due to "transitory factors", the Fed says - the path toward the initial hike and a series of slow increases toward a "normal" rate has remained in question.

Analysts until recently were expecting the Fed to act in its September policy meeting.

However, some weaker data, including a poor report on consumer spending released on Tuesday, and worries about eurozone fragility due to the Greek debt crisis and China's market meltdown, now have some economists expecting a move in December at the earlier, and possibly not until next year.

Ms Yellen, in semi-annual testimony to the Financial Services Committee of the House of Representatives, stuck to the position of the last meeting of the Federal Open Market Committee.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," she said.

She stressed though that the decision remains dependent on what data tells the Fed, and noted "uncertainties" clouding the picture.

"Foreign developments, in particular, pose some risks to US growth," she warned. She pointed to the still-unsettled situation between Greece and its creditors over a third massive rescue plan being prepared.

And she noted that China "continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions." On the other hand, she said, "economic growth abroad could pick up more quickly than observers generally anticipate, providing additional support for US activity."

AFP