Fed will 'remain cautious' about hiking rates

The US Labour Department report in May showed that employers created a disappointing 38,000 new jobs - fewer than in any month since September 2010.
The US Labour Department report in May showed that employers created a disappointing 38,000 new jobs - fewer than in any month since September 2010.PHOTO: AGENCE FRANCE-PRESSE
The US Labour Department report in May showed that employers created a disappointing 38,000 new jobs - fewer than in any month since September 2010.
Us Federal Reserve Chairman Janet Yellen

Central bank chief's comments come as IMF cuts its forecast on US economic growth

WASHINGTON • Federal Reserve chairman Janet Yellen yesterday ended her testimony on monetary policy before US lawmakers, reiterating the central bank's cautious approach to raising interest rates.

Ms Yellen appeared before the House Financial Services Committee, a day after speaking before the Senate Banking Committee, where she expressed general optimism about the economy and played down the risk of a recession. The Fed will be cautious about interest rate increases until it is clear the job market is holding up, she said.

Her speech came as the International Monetary Fund (IMF) cut its forecast for US growth this year, urging the central bank to lean towards modestly overshooting its inflation target in considering whether the economy can handle higher interest rates.

The IMF said the United States economy will grow 2.2 per cent this year, less than its projection of 2.4 per cent in April. The fund left unchanged its forecast for a 2.5 per cent expansion in 2017.

"We also support the view that any such decision to increase rates should be data-dependent, should be gradual and should clearly be focused on the objective of stability, and not abrupt decisions one way or another," IMF chief Christine Lagarde said in a news conference on the fund's US policy review released yesterday. She said the IMF was "aligned" with the Fed, adding that she would not want to see the central bank in a position of having to reverse course on interest rates.

SOFTLY, SOFTLY

We are taking a cautious approach and watching very carefully to make sure that that expectation is borne out before we proceed to raise interest rates further.

US FEDERAL RESERVE CHAIRMAN JANET YELLEN, on the loss of pace in growth.

The Fed last week signalled it would raise rates more gradually than anticipated amid concerns about slow job gains and the potential exit of Britain from the European Union. The Fed left its target range for the benchmark federal funds rate unchanged at 0.25 per cent to 0.5 per cent.

On Tuesday, Ms Yellen expressed hope that the slowdown in the job market would prove temporary.

The Labour Department report in May showed that employers created a disappointing 38,000 new jobs - fewer than in any month since September 2010.

A strong job report for June could convince some policymakers that May was something of an anomaly. But Ms Yellen also highlighted worries over longer-term problems for the economy that are unlikely to reverse any time soon.

Those "headwinds", like weak productivity growth or tepid business investment, may only slowly fade over time, she said. In that context, there would be little need to raise interest rates quickly so long as inflation remains around the Fed's 2 per cent goal.

Immediate risks, like the potential fallout from Britain's vote on whether to leave the EU, could darken the US economic outlook, as could a downturn in productivity growth that may prove a permanent drag on the economy.

"We believe that will turn around, we expect it to turn around, but we are taking a cautious approach and watching very carefully to make sure that that expectation is borne out before we proceed to raise interest rates further," she said.

Her comments suggest the US central bank is unlikely to raise rates at its next policy meeting in late July, since it will only have one additional monthly employment report in hand by that time.

They also demonstrate how a new sense of uncertainty has taken root as Fed policymakers come to grips with a broadening realisation that the economy's potential appears to be weaker than previously thought.

Meanwhile, a report by the Federal Housing Finance Agency yesterday showed US home prices rose 5.9 per cent in April from a year earlier. Prices climbed 0.2 per cent on a seasonally adjusted basis from March.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 23, 2016, with the headline 'Fed will 'remain cautious' about hiking rates'. Print Edition | Subscribe