WASHINGTON • US Federal Reserve chairman Janet Yellen said the Fed still expects to raise interest rates gradually while making it clear that continued market turmoil could throw the central bank off course from the multiple increases policymakers have forecast for this year.
Dr Yellen kicked off two scheduled days of testimony on Capitol Hill by also telling lawmakers that uncertainty over China's economic prospects and exchange rate policy had "exacerbated concerns about the outlook for global growth" and contributed to the latest drops in oil and other commodities. The risk for the United States economy is if the commodities bust triggers stresses around the world that threaten demand for US exports, she said.
In testimony that combined a steady-as-she-goes account of Fed policy with an acknowledgement of intensifying risks, Dr Yellen said that there are good reasons to believe the US will stay on a path of moderate growth that will allow the Fed to pursue "gradual" adjustments to monetary policy.
Family incomes and wealth are rising, domestic spending "has continued to advance" and business investment outside the oil sector accelerated in the second half of the year, she said.
Dr Yellen said she expects the labour market to continue to improve and inflation to eventually rise towards the Fed's target despite a recent drop in inflation expectations cited by some policymakers as particularly unnerving.
But she acknowledged that some of the weaknesses in the global economy have become self-reinforcing, with weak growth in major manufacturers like China and oversupply on commodity markets rattling the world's oil and mineral exporters.
A broad sense of a world slowdown, in turn, and uncertainty about the depth of China's problems, has tightened financial conditions for US businesses.
"Financial conditions in the United States have recently become less supportive of growth," Dr Yellen said in the testimony before the House Financial Services Committee. "These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market."
Dr Yellen kept the door open for a rate increase next month, though she did not explicitly refer to any tightening timeline or the Fed's next meeting. "Of course, monetary policy is by no means on a preset course," the 69-year-old said.
Eight weeks after raising interest rates for the first time in nearly a decade, Fed officials are struggling to judge whether financial market turmoil and a dimmer outlook abroad undermine their US forecast and the need for additional policy tightening. They next gather to consider a rate change on March 15-16.
With her testimony yesterday, Dr Yellen joined vice-chairman Stanley Fischer and other senior Fed officials in declaring it is too soon to tell whether sharp drops in stocks, oil prices and some bond yields represent passing volatility or reflect worsening global economic fundamentals that will dampen growth and inflation in the US.
The Fed chief is required to appear before Congress twice a year. She is set to appear today before the Senate Banking Committee.