Yellen flags ‘gradual’ interest rate policy

Yellen flags ‘gradual’ interest rate policy

US Federal Reserve chair Janet Yellen has announced that only “gradual increases” in the federal funds rate will be warranted in coming years.

In a speech to the Economic Club of New York, Ms Yellen said economic conditions will evolve in a manner that will justify only gradual increases in interest rates.

She said it is appropriate for the Federal Open Market Committee (FOMC) to “proceed cautiously in adjusting policy”.

Ms Yellen's comments signalled that the Fed is increasingly focused on global financial market data than economic fundamentals. 

“The proviso that policy will evolve as needed is especially pertinent today in light of global economic and financial developments since December, which at times have included significant changes in oil prices, interest rates, and stock values,” she said. 

Despite an expected improvement in US labour market conditions and a return of inflation to the Fed’s 2 per cent target, Ms Yellen said global developments have increased the risks “associated with that outlook”.

The Fed chair said concerns pertain to the pace of global growth and the influence of developments in China. A second concern, Ms Yellen stated, relates to the outlook for commodity prices, particularly oil. She said if oil prices were to fall again, it could have “adverse spillover effects” to the global economy. 

“If such downside risks to the outlook were to materialize, they would likely slow US economic activity, at least to some extent, both directly and through financial market channels as investors respond by demanding higher returns to hold risky assets, causing financial conditions to tighten.”

Following Ms Yellen's comments, Morningstar noted that stock markets bounced in response.

“Stocks rose after Yellen announced that the Fed needed to proceed cautiously on raising interest rates given fears about the domestic and global economies,” Morningstar said.

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