‘Uncertainty’ over China’s yuan fuels market turmoil: Yellen

In prepared remarks before a Congressional committee, Yellen said the path of interest rates is not on a “preset course”, acknowledging that increasing concerns for economic growth both at home in the US and overseas could derail the Fed’s plans to normalize USA monetary policy by raising rates.

While Dr Yellen said the United States central bank was still on track for “gradual” rate rises, she struck a more cautious tone about the economic outlook compared to when the central bank raised interest rates in December for the first time in 9½ years.

Yellen reiterated that the Fed expects to have “gradual” interest rate increases.

Last March, the Committee stated that it would be appropriate to raise the target range for the federal funds rate when it had seen further improvement in the labour market and was reasonably confident that inflation would move back to its 2%objective over the medium term.

In her most extensive comments on the situation in China, Yellen said that various economic indicators do not suggest that the world’s second largest economy was undergoing a sharp slowdown.

“Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending”, Yellen said. Vice Chairman Stanley Fischer said that inflation will likely remain lower for longer than expected, cautioning that “persistent tightening” in financial markets could affect growth and inflation. This is down from 2.3 percent at the start of the year, as safe-haven buying has continued to weigh on yields.

SocGen expects the Federal Reserve to abandon its tightening regimen as global monetary policy shifts further toward negative interest rates. Should that occur, the Fed will be ready to hike rates more quickly than now anticipated.

Yellen singled out uncertainty over recent changes in China’s currency policy and the prospects for its economy as a particular culprit behind recent financial market volatility, with the potential to drag down other countries dependent on commodity and other exports to China.

China’s economy, as is well known, has been slowing for years and at least in Yellen’s view this is nothing that, on its own, should give market’s pause. U.S.-produced crude climbed more than 2% and back above $28 a barrel to $28.57.

“Let’s remember that the labor market is continuing to perform well, to improve”, she said.

Yellen noted that USA economic growth in 2015 slowed to an estimated 1.75 percent, restrained especially by the impact of a strengthened dollar on exporters.

But on Wednesday, she told the House Committee on Financial Services that domestic conditions “have recently become less supportive of growth”. In prepared testimony, she pointed to recent declines in stock markets, higher interest rates for risky borrowers and the growing strength of the dollar as potential threats to the nation’s recovery.

Still, her focus on financial conditions, foreign uncertainty and inflation expectations showed that the bar has risen for further action.

The S&P 500 .SPX was up 10.97 points, or 0.59 percent, at 1,863.18 and the Nasdaq Composite index .IXIC was up 37.33 points, or 0.87 percent, at 4,306.10. The Fed had put rates near zero December 2008 to help the economy rebound from the Great Recession.