Stock markets remained buoyant on Wednesday even after Fed Chair Janet Yellen did not explicitly rule out a March interest rate hike from the central bank.
Instead, she suggested the US central bank could slow the pace of future interest rate increases if the uncertainty in markets starts to weigh on US growth.
US stocks advanced, with the Standard & Poor’s 500 Index rebounding from its lowest level since 2014. The S&P 500 gained 0.8 per cent to 1,867.35 at 9.32am in New York, after the benchmark yesterday closed 13 per cent below its all-time high set in May.
In her semi-annual report to Congress on Wednesday, she noted the widening fallout from concern over China’s weaker currency and economic outlook, which has rattled financial markets.
In testimony that combined a steady-as-she-goes account of Fed policy with an acknowledgement of intensifying risks, Yellen said 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.
Yellen said she expects the labour market to continue to improve and inflation eventually rise toward the Fed’s target despite a recent drop in inflation expectations cited by some policymakers as particularly unnerving.
But Yellen acknowledged that some of the weaknesses in the global economy have become self re-enforcing, 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.
“These developments if they prove persistent, could weigh on the outlook for economic activity and the labour market,” Yellen said in remarks prepared for her semi-annual appearance before the House Committee on Financial Services. A hearing before the committee begins at 10am (1500GMT) An accompanying report said the US financial sector “has been resilient” to stress from oil and weakening corporate debt markets around the world, with “limited” exposure among large US banks. But “if conditions in these sectors worsen ... wider stresses could emerge.” 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.
“Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial markets could tighten further,” she said.
-Compiled from wires
