Lots of unknowns keeping the Fed cautious

AP News
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Posted: Jun 21, 2016 5:18 PM
Lots of unknowns keeping the Fed cautious

WASHINGTON (AP) — Federal Reserve Chair Janet Yellen said Tuesday that the U.S. economy faces numerous uncertainties from slowing job growth to stubbornly low inflation that compel the Fed to proceed cautiously in raising interest rates.

In her semi-annual report to Congress on Tuesday, Yellen expanded on a theme she has raised lately about the country's long-term health: The economy may be stuck in a prolonged period of slow growth that will keep rates ultra-low for an extended period of time.

"Considerable uncertainty about the economic outlook remains," Yellen told members of the Senate Banking Committee. "Although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future."

Yellen's comments seemed to be a nod to the arguments advanced by former Treasury Secretary Larry Summers that the economy is stuck in period of secular stagnation, a slow-growth funk that isn't going to end in the foreseeable future.

In her news conference last week, Yellen discussed various headwinds such as weak productivity and the aging of the population, which could keep the Fed's policy rate lower for a longer period.

She said Fed officials were constantly reassessing those forces and deciding whether they "are not going to be rapidly disappearing but will be part of the new normal."

Yellen's comments Tuesday marked the third time in recent weeks that she has stressed all the unknowns that are keeping the Fed from raising rates.

"Yellen has certainly become less optimistic about future economic growth," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "She is citing the slowing in productivity, the slowing growth of the labor force and a mountain of global uncertainties."

In delivering the Fed's twice-a-year economic report to Congress, Yellen cited a marked slowdown in job growth in April and May and said the Fed will be watching carefully to see whether the weaker momentum is temporary or a sign of a bigger problem.

Yellen also expressed concerns about the global economy, including slower growth in China and the upcoming vote in Britain over leaving the European Union, which "could have significant economic repercussions." She also noted weak productivity growth in the U.S. and persistently low inflation

Yellen emphasized the same cautious approach the central bank took following its meeting last week when it left a key interest rate unchanged. The Fed boosted its benchmark rate by a quarter-point in December to a range of 0.25 percent to 0.5 percent and at the time projected another four rate hikes this year.

But since December, financial market turbulence at the beginning of the year, a global economic slowdown and a sharp drop in oil prices have kept the Fed on the sidelines. Fed officials are now projecting just two rate hikes this year.

Yellen acknowledged to senators the problems weighing on the economy.

"Economic growth has been uneven over recent quarters," she said. "Subdued foreign growth and the appreciation of the dollar weighed on exports while the energy sector was hit hard by the steep drop in oil prices since mid-2014. In addition, business investment outside of the energy sector was surprisingly weak."

During the question and answer session, Yellen was asked about the likelihood that the country could be in a recession by the end of the year. She said she expects the U.S. economy to grow and described the possibility of a recession this year as "quite low."

While overall growth, as measured by the gross domestic product, slowed to a tepid rate of just 0.8 percent in the first quarter, Yellen in her testimony pointed to encouraging signs that growth was strengthening in the second quarter.

But even with a rebound in growth and job creation, the recovery has been uneven, Yellen said. While the overall employment rate has fallen to 4.7 percent from a high of 10 percent, Yellen said it was "troubling" that the rate for African Americans and Hispanics remained above the national average.

Some private economists believe the central bank might raise rates at its next meeting on July 26-27 if markets are not roiled by Britain's upcoming vote and the June employment report bounces back. But other analysts think the first rate hike this year is more likely to happen in September, followed by another in December.