U.S. Federal Reserve chairwoman Janet Yellen on Wednesday signals that the Fed still keeps door open to further interest rate hikes, but flagging risks that could delay any further moves.
"With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen," Yellen said in a testimony before the Committee on Financial Services of the U.S. House of Representatives on Wednesday.
The ongoing employment gains and faster wage growth could support consumer spending, and with accommodative monetary policies abroad, global growth could pick up over time, Yellen said. The Fed chair said she expects the labor market to continue to improve and inflation eventually to rise toward the Fed's target despite a recent drop in inflation expectations that has concerned some policymakers.
But she acknowledged that financial conditions have become less supportive of growth, "with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar."
"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said. She also flags the risks of global developments to the U.S. economic outlook.
Although China's economic slowdown does not appear to be sharp, she expressed concern about the uncertainty of China's exchange rate policy that she said led to market volatility and exacerbated concerns about the outlook for global growth.
She also voiced her concern over the negative impacts of the low commodities prices on commodity-exporting countries. "Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further," Yellen said.
The Fed decided to raise benchmark interest rate by 25 basis points in December last year, the first interest rate increase since 2006 and marking the end of an era of extraordinary easing monetary policy. The central bank hold off rate hike in its recent policy meeting in January, signaling its concern about the strength of the U.S. economy in the face of global uncertainty and weak energy prices.
Yellen's testimony on Wednesday failed to offer any signal on whether the central bank will change the interest rate on its next policy meeting on March 15-16. She only repeated that the actual path of the interest rate will depend on incoming data.
With her testimony on Wednesday, Yellen joined Fed Vice Chairman Stanley Fischer and other central bank officials, who implied that it will take some time to assess the impact of the recent market turmoil on the health of the U.S. economy.
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