Fed Chair Janet Yellen walked a fine line in her testimony before the House Financial Committee, a semiannual event that will be repeated before the Senate Banking Committee on Thursday, addressing many of the market's questions about Fed policy but not committing to any changes. Economists disagreed on what her remarks meant for rate hikes — or cuts — over the next year.
For those wondering whether the Fed would reverse course, undo its December rate hike and possibly adopt negative interest rates like the Bank of Japan and several European banks have, Yellen admitted that "the economic outlook is uncertain … foreign economic developments, in particular, pose risks to U.S. economic growth … [and] "financial conditions in the United States have recently become less supportive of growth."
But Yellen said she doesn't expect the Fed will soon be "in the situation where it is necessary to cut rates" and the Fed may not have the legal authority to institute negative rates, though she doesn't "know of any restriction that prevents us to do that." Adopting negative rates "remains a question we would need to investigate more thoroughly," Yellen said, noting that the Fed considered the question In 2010, though not in-depth.
On the flip side, Yellen gave no indication that the Fed was in any rush to raise rates, either, following its December hike — the first hike in years. Yellen repeated her mantra that Fed monetary policy "is not a present course" and will, as usual, take into account changing developments and events. On that score she noted that U.S. labor market conditions "have improved substantially," though there is still room improvement, while inflation remains below the Fed's annual 2% target. These are key data points for the Fed's dual mandate: to promote full employment as well as price stability. Yellen noted the Fed will update its economic projections, including inflation forecast, at its next policymaking meeting in mid-March.
Yellen "tried to walk the line by acknowledging there is increased risk to the U.S. economy presented by global financial markets but she was also careful to indicate that that risk is not overwhelming, says Thomas Simons, money market economist at Jefferies. "The Fed will probably not be raising rates until things calm down, but Yellen said nothing alarmist, nothing about rolling back the normalization process."
