Fed's Yellen says global growth, fiscal policy key to outlook

[WASHINGTON] "Surprises" in the world economy and the still undetermined spending policies of the Donald Trump administration have the potential to impact the course of US interest rate policy, Federal Reserve chief Janet Yellen said Thursday.

Speaking on the eve of Mr Trump's inauguration, Ms Yellen's only mention of the future president's possible policies came in the final paragraph of a 17-page prepared speech, and was similar to her recent past statements.

"I would mention the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path," she told the Stanford Institute for Economic Policy Research in California.

"At this point, however, the size, timing, and composition of such changes remain uncertain."

This echoed a similar statement in a speech in San Francisco on Wednesday, when she said central bankers would "closely follow" the economic policy changes under consideration in the Trump administration.

Mr Trump has promised massive spending on infrastructure as well as corporate tax cuts and deregulation.

In her latest remarks, Ms Yellen stressed that "monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one."

In her lengthy explanation of the calculations that go into decisions about the benchmark interest, she also said that "the strength of global growth will also have an important bearing" on the path of interest rates.

She cautioned that "the scope for surprises is considerable," but she did not provide any details on the global outlook.

Officials in the Federal Reserve's policy-setting Federal Open Market Committee (FOMC) last month indicated they expect three rate increases this year, and Ms Yellen repeated that the best option is to "adjust the stance of monetary policy gradually over time - a strategy that should improve the prospects that the economy will achieve sustainable growth".

After a long, sluggish recovery from the 2008 financial crisis, inflation finally is starting to move upwards towards the Fed's two per cent target as the job market improves and wages rise, but Ms Yellen rejected the notion of allowing the economy to get too hot, calling the idea "risky and unwise".

She warned that "waiting too long to tighten policy could require the FOMC to eventually raise interest rates rapidly, which could risk disrupting financial markets and pushing the economy into recession".

The Fed chair, who has been the target of criticism by Mr Trump for her handling of monetary policy during the recovery, once again argued against using formulaic and rigid rules for adjusting interest rates, including the famous Taylor rule, which some Republicans in Congress want to require the Fed to follow.

The rule, originally published in 1993, calls for systematic changes in interest rates based on just three economic variables, two of which are subject to interpretation.

While the Fed evaluates the various rules which can serve as "useful benchmarks", she stressed that "the rules should not be followed mechanically, since doing so could have adverse consequences for the economy".

The Taylor rule, for example, would have called for much higher interest rates during the slow US recovery, she said.

Simple policy rules "typically neglect information with potentially important implications for the economic outlook" and "ignore such important factors as fiscal policy, (and) trends affecting global growth".

AFP