The president of the Federal Reserve (Fed) Janet Yellen said Tuesday that “considerable uncertainty” hanging over the economic outlook and the global economy remained “vulnerable”.
The consequences of EU output of the United Kingdom are “difficult to predict” Yellen said during hearing biannual before a congressional committee.
A vote in favor of Brexit could initiate “a period of volatility in financial markets could have a negative impact on the financial terms and on the US economic outlook,” she warned. The British are pronounced Thursday on the referendum.
Yellen is particularly concerned about abrupt changes in investor that may cause the British referendum, in an international economic environment where growth is already the “lethargic”, low inflation and monetary policy “highly accommodative”.
She cited for example the fear of capital flows to “security” that could “push the dollar” on the rise.
“For all these reasons, the Monetary Committee closely monitors international economic and financial developments,” she said.
Overall, “vulnerabilities remain” internationally, said the boss of the central bank. She felt that if the fears of a Chinese slowdown were somewhat allayed, Beijing “continues to face considerable challenges to rebalance its economy (…)”.
On the domestic front, the US job market has marked a “slower growth” after disappointing job creation in May and the growth in recent quarters was “irregular”.
Yellen stressed in particular that it was particularly “disturbing” that unemployment affects more minorities, especially blacks and Hispanics.
Cautious approach on rates
Under these conditions, Yellen called for a “cautious approach” before raising interest rates in the United States.
“Adopting a cautious approach in raising rates will allow us to maintain monetary support economic growth while we assess whether this growth will return to a moderate pace,” she said.
Last week, the Monetary Policy Committee of the Fed (FOMC) decided again to leave interest rates unchanged face “irregular evolution” of the activity and the spectrum of a Brexit that could cause turmoil in financial markets.
“We will closely observe the job market to see if the recent slowdown is temporary, as we think,” she said, asking not to focus on one monthly report on employment. But it does not exclude that the low productivity improvements continue.
Yellen has, nevertheless, called “optimistic” on the improvement of the labor market and the evolution of inflation to the 2% target for the Fed, “in the coming years.”
The Monetary Policy Committee still expects “a gradual rise in rates” if the prosperous economy, she assured reminding that this proceeding was expected rate below 1% this year (from 0.25% currently 0.50%) and below 2% next year, the latter forecast was revised down.
Asked about the possibility for the Fed to have legal recourse to negative rates like its counterparts in Europe and Japan, Yellen reiterated that it was “not something that was planned” for now although legally the central bank is able to do so.
Jim O’Sullivan, chief economist at HFE, “the president of the Fed hardly pressed watch to raise rates again” after the first increase it six months ago after seven years of monetary policy zero rate.
“Given this ultra cautious tone, a credit crunch in July appears very unlikely even with solid employment figures in June,” he said adding that by the next monetary meeting in September, three reports employment have been published.