WASHINGTON, D.C.: Federal Reserve Chair Janet Yellen on Wednesday (Thursday in Manila) stuck to her forecast for an increase in the Fed’s key interest rate later this year, predicting a pick-up in the US economy.
But she also warned that continued turbulence from Greece and China poses risks to the US growth picture.
In testimony to Congress, Yellen expressed confidence in the economy picking up pace in the coming months, suggesting it could surprise on the upside.
The labor market still showed “some” slack, she noted—one reason accommodative monetary policy was still merited despite the unemployment rate having dropped to 5.3 percent.
“Too many people are not searching for a job but would likely do so if the labor market was stronger,” Yellen said.
“And, although there are tentative signs that wage growth has picked up, it continues to be relatively subdued, consistent with other indications of slack.”
Even so, she said, prospects are for more improvement in the second half of the year that would support the Fed moving toward its first rate increase since 2006.
Moreover, she allowed, the economy “also might snap back more quickly” than generally expected as the drag from the slow first half of the year dissipates.
The US central bank has kept markets on edge for a raise in the federal funds rate, which has been locked extraordinarily at zero since the end of 2008 to pull the economy back from the Great Recession.
Since early last year, the first rate increase was flagged for around mid-2015.
But with economic growth stalling in the first quarter—mostly due to “transitory factors,” the Fed says—the path to the initial hike and a series of slow increases toward a “normal” rate has remained in question.
Analysts until recently were expecting the Fed to act in its September policy meeting.
However, some weaker data, including a poor report on consumer spending released on Tuesday, and worries about eurozone fragility due to the Greek debt crisis and China’s market meltdown, have encouraged some economists to think the move will not come before December, and possibly not until next year.
Analysts: Yellen more bullish
Yellen, in semi-annual testimony to the Financial Services Committee of the House of Representatives, stuck to the position of the last meeting of the Federal Open Market Committee for a rate hike “at some point this year” if “the economy evolves as we expect.”
She stressed though that the decision remains dependent on what data tells the Fed, and noted “uncertainties” clouding the picture.
“Foreign developments, in particular, pose some risks to US growth,” she warned. She pointed to the still-unsettled situation between Greece and its creditors over a third massive rescue plan being prepared.
And she noted that China “continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions.”
On the other hand, she said, “economic growth abroad could pick up more quickly than observers generally anticipate, providing additional support for US activity.”