Federal Reserve Chairwoman Janet Yellen hinted to Congress Wednesday that the central bank had increased trepidation over the path of interest-rate increases, pointing to accumulating risks to the economy in recent weeks.
In the first of two days of semiannual testimony before House and Senate committees, Ms. Yellen on Wednesday said falling stock prices and other financial-market turbulence could impede economic growth, as could stresses in China and other foreign economies.
Further complicating matters for the Fed, she also pointed out that market expectations for consumer prices are sinking, a sign investors might be losing faith in the Fed’s ability to lift inflation to the 2% target it has undershot for more than three years.
“Financial conditions in the United States have recently become less supportive of growth,” Ms. Yellen said, pointing to stock-market declines and higher interest rates for riskier borrowers, among other events. She warned of a possible impact on economic activity and the labor market should the developments persist.
Investors weren’t surprised by Ms. Yellen’s caution. Yields on 10-year Treasury notes were little changed, dropping 0.022 percentage point to 1.706%. The Dow Jones Industrial Average turned lower in the afternoon, well after her testimony was finished, ending down 99.64 points, or 0.62%, to 15914.74.
While Ms. Yellen didn’t explicitly mention delayed rate increases, her recitation of increased risks was a potentially telling sign of the Fed’s leanings.
In December, when the Fed raised short-term rates from near zero, officials in their official policy statement described risks to the economy as balanced, meaning they thought it was just as likely that the economy would perform better than expected as it would worse than expected. After their January meeting, they said the outlook was too muddy to say for sure whether the risks were still balanced.
On Wednesday, Ms. Yellen’s list of threats to the economic outlook was far longer than reasons for optimism.
When pressed during her testimony about whether the Fed was changing the relatively upbeat view about the economy that led to the December rate increase, Ms. Yellen hinted she’s leaning in that direction but hasn’t yet made up her mind. “Maybe, but the jury is out,” she said.
Some Fed officials have said recently the central bank needs to take a stance of “watchful waiting” before raising rates again. Ms. Yellen echoed that. “We are watching very carefully what’s happening in global financial markets,” she said.
When the Fed pushed short-term interest rates higher in December, officials penciled in four quarter-percentage-point rate increases for 2016. Investors have been skeptical of those projections, increasingly so in recent weeks.
The Fed’s next policy meeting is March 15-16. Traders in futures markets see virtually no chance of a move then and just a 19% chance the Fed will move at all again this year, according to the Chicago Mercantile Exchange. The Fed’s current target for its benchmark federal-funds rate is between 0.25% and 0.5%.
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