WASHINGTON — Federal Reserve chairwoman Janet Yellen warned Wednesday of global economic turmoil and that the US economy faced risks from tightening domestic financial conditions.
Ms Yellen said in prepared testimony to Congress that the outlook for the US economy had become more cloudy.
She made it clear that continued market turmoil could throw the central bank off course from the multiple increases that policy makers have forecast for 2016.
“Financial conditions in the US have recently 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,” she said.
“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market.”
Ms Yellen said the Fed still expected the US economy to grow at a moderate pace this year, noting that recent employment gains and a tentative rise in wages “should support the growth of real incomes and therefore consumer spending”.
But she said that market turmoil abroad was also buffeting US economic momentum, and could drag down growth.
The sharp fall in commodity prices — which she linked in part to “uncertainty” about China’s economy and its policies — threatened to “trigger financial stresses” in commodity-exporting countries and companies. “Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further.”
After having increased its benchmark federal funds rate in December for the first time in seven years — to 0.25-0.50% — Ms Yellen would say only that the Fed “expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the coming years”.
The key determinants of Fed monetary policy-setting — inflation and unemployment — were still giving mixed signals about the strength of the US economy in the short term, according to Ms Yellen’s testimony.
Unemployment had fallen to an eight-year low, 4.9%, with positive signs in rising wages and a drop in the number of people who want but cannot find full-time work.
Even so, there were still indications that “some slack” remains in the labour market and “there is still room for further sustainable improvement”. Inflation, meanwhile, remains well below the Fed’s 2% target rate, mainly due to the continuing impact of the plunge in oil and other commodity prices. While the Fed expects inflation to move up over the medium term, the weakness suggests the Fed should not move quickly to tighten policy.
Ms Yellen singled out China as a source of some of the major risk to US growth, through a chain of spillover effects from its unclear policy on the yuan currency, or renminbi.
The yuan’s recent declines “have intensified uncertainty about China’s exchange rate policy and the prospects for its economy”, she said.
“This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth.”
In turn, she said, that was contributing to the fall in the prices of oil and other commodities.
“Low commodity prices could trigger financial stresses in commodity-exporting economies” as well as in commodity-producing firms around the world, she said.