Fed cautious on rates due to Brexit, hiring slowdown: Yellen

Fed Chair Janet Yellen testifying during a Senate Banking Committee hearing in Washington, DC, on June 21.
Fed Chair Janet Yellen testifying during a Senate Banking Committee hearing in Washington, DC, on June 21.PHOTO: BLOOMBERG

WASHINGTON (Reuters) - Global risks and a US hiring slowdown warrant a cautious approach to raising interest rates as the Federal Reserve looks for confirmation that the country's economic recovery remains on track, Fed Chair Janet Yellen said on Tuesday (June 21.

In testimony before the Senate Banking Committee, Yellen outlined how the Fed was thrown off course within weeks of its December rate hike by a US economic slowdown, concerns about China's growth path, a drop in oil prices and other events.

Some of those clouds remain, Yellen said in comments that seemed to signal no pressing need for the Fed's policy-setting committee to raise rates.

Before a further tightening of monetary policy, she said, the Fed needs to be sure US economic growth and hiring have rebounded and there is no shock from the outcome of Britain's June 23 vote on whether to leave the European Union.

"The pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach ... remains appropriate," Yellen said as she delivered the Fed's semi-annual monetary policy report to Congress.

Asked by a lawmaker if Britain's departure from the EU could trigger a recession in the United States, Yellen said: "I don't think that is the most likely case, but we just don't really know what will happen and we will have to watch very carefully."

With a weak global economy, low US productivity and other factors holding down interest rates in the long run, Yellen said the Fed's benchmark overnight interest rate is likely to remain low "for some time."

Current Fed policymakers' forecasts foresee two rate increases this year and three each in 2017 and 2018, a slower pace from their projections in March.

Job gains averaged 200,000 per month in the first quarter but averaged only about 80,000 in April and May, a possible"loss of momentum," according to the monetary policy report submitted in conjunction with Yellen's appearance.

"It's a rehash. The underlying message is a continuation of the trend that the Fed is moving toward a more cautious stance to support this economic expansion with the fragility of the economic backdrop," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

The Fed under Yellen has begun nudging rates higher, but also has steadily downgraded its forecasts of the US economy, delayed expected rate increases, and left investors perplexed about what's influencing its decisions.

The economy is near full employment and inflation has shown signs of picking up, putting the economy close to meeting the Fed's twin goals.

Yet Yellen and other policymakers remain tentative. Weak global demand and the impact of a strong dollar have hurt US manufacturing, and the May jobs report raised the specter of slowing employment growth.

Some officials have openly worried that the United States is being held back by a variety of global and domestic issues that will mean subpar growth and abnormally low interest rates for years to come.

Alongside chronic challenges like low productivity and an aging population, the "Brexit" referendum on Thursday is considered a possible flashpoint for the global economy if Britain decides to cut its ties to the EU.