With much anticipation of her Wednesday testimony to the House Financial Services Committee, Federal Reserve Chair Janet Yellen reiterated the Fed’s confidence that the U.S. economy is on track for stronger growth in 2016, and she expects to see an up-tick in inflation. Over the past year and a half, a much stronger U.S. dollar has held down inflation by making foreign goods cheaper for Americans. Yellen believes the U.S. job market remains solid with unemployment down to 4.9 percent and noted that worker pay rates are increasing. The U.S. economy is currently being fueled by home building and auto sales, and the central bank still believes energy price declines and a stronger dollar will fade in coming months which should move inflation back up to the Fed’s 2 percent target rate.
At the same time, Yellen said weaker economic figures have begun to emerge and made it clear the Fed is nervous about global risks. Her concerns about the perils to U.S. growth are in stark contrast with the Fed’s statement eight weeks ago, when it raised interest rates for the first time in nearly a decade and described economic risks as “balanced.” She cautioned that the sharp declines in stock prices, rising rates for riskier borrowers, and further strength in the dollar had created conditions that pose risks to growth. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices could provide some offset,” she said.
After the Fed began raising rates two months ago, economists widely expected gradual and steady rate increases this year with the next move most likely occurring in March. Since then, many economists have scaled back their expectation for four rate hikes this year down to perhaps only two, with the next increase likely not occurring until June. Yellen said the Fed still expects to raise rates gradually but is not on any preset course. The central bank will likely slow its pace of rate increases “if the economy were to disappoint,” she said.
Yellen’s testimony also included her most extensive comments to date on China’s economy. “The data so far do not suggest that the world’s second-largest economy is undergoing a sharp slowdown, but declines in that country’s currency have intensified concerns about China’s economic prospects. This uncertainty has led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth.”
We will continue to stay abreast of Fed policy and economic developments as we chart investment direction.
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Published: February 11, 2016
Authored By: Chad A. Sander, CFP®
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