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Yellen warns of rising risks to US economy

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Federal Reserve Chair Janet Yellen warned on Wednesday that the US economy faced risks from tightening domestic financial conditions as well as global economic turmoil.

[WASHINGTON] Federal Reserve Chair Janet Yellen warned on Wednesday that the US economy faced risks from tightening domestic financial conditions as well as global economic turmoil.

Showing more pronounced concern over the economy than when she last spoke publicly, in December, Ms Yellen's comments lessened the possibility of another interest rate increase in its next policy meeting in March.

"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar," she told the House Financial Services Committee.

"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market."

She also singled out China's confusing policy on its yuan currency as stirring more turbulence in global markets including those for vital commodities, also threatening US growth.

But she made no predictions on rates, and stuck to the official view of the Fed's Federal Open Market Committee that the US economy should continue to grow at a moderate pace this year.

Ms Yellen argued that, despite the warning clouds, recent employment gains and a tentative pickup in wages "should support the growth of real incomes and therefore consumer spending." That supported the Fed's pursuit of a "gradual" increase in interest rates, she said.

Her comments disappointed many in markets expecting a more explicit sign that the Fed would back away from December's forecast of four quarter-point rate hikes this year.

Indeed, the Fed chair bluntly dismissed questions of whether there could be a need to actually reduce rates, even into negative territory as the Japanese and European central banks have done.

"I do not expect that the FOMC is going to be soon in this situation where it's necessary to cut rates," she said.

"Let's remember that the labour market is continuing to perform well."

Ms Yellen remained confident that the unemployment rate will continue to fall from the current 4.9 per cent and that inflation, held extremely low by transient factors like the oil price crash, would eventually turn up toward the Fed's 2.0 per cent target.

Analysts said nevertheless that her comments felt more dovish, less confident than when she announced the Fed's first interest rate hike in more than nine years in December.

She told the panel on Wednesday that market turmoil abroad was buffeting US economic momentum, and could drag down US growth.

The sharp fall in commodity prices - which she linked in part to "uncertainty" about China's economy and its currency policies - threatened to "trigger financial stresses" in commodity-exporting countries and companies.

"Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further."

Ms Yellen's emphasis on the downside risks to the economy "makes an increase in the funds rate in March very unlikely," said PNC Bank senior economist Gus Faucher.

"Yellen's testimony left open the door to a March hike, but laid out plenty of reasons for inaction too," said Ian Shepherdson of Pantheon Macroeconomics.

Mr Shepherdson said her ambiguity left room for the FOMC to wait for more economic data on the US and global economies over the next month to choose its path.

Markets initially showed disappointment that Ms Yellen did not spell out slower pace for rate rises, but were little-changed by the end of the day.

The dollar traded late Wednesday slightly lower at US$1.1291 per euro, after having strengthened immediately after her statement.

On the stock market, the S&P 500 ended virtually unchanged helped by a tech stock rebound while the Dow Jones Industrial Average fell 0.6 per cent.