WASHINGTON – Federal Reserve Chair Janet Yellen indicated Monday that the U.S. economy is improving but remains defined by so many uncertainties that it’s unclear when the Fed should resume raising interest rates.
Speaking in Philadelphia, Yellen struck a mainly positive and optimistic tone about the economy. She noted that the job market had strengthened significantly since the Great Recession and said that consumer spending and economic growth seem likely to accelerate after a tepid start to 2016.
But the Fed chair suggested that a dismal jobs report that the government issued Friday had raised some doubts about the broader economy. She referred repeatedly to the uncertainties surrounding the Fed’s outlook.
In doing so, Yellen dropped a reference she had made in a speech May 27 that a Fed rate hike would likely be appropriate “in the coming months.” In its place, she offered no specific timetable for the Fed to act.
Yellen’s speech had been highly anticipated given that it comes just a week before the central bank’s next meeting. Until last week, many analysts had thought the Fed could raise rates on June 15 – or, if not then, at its subsequent meeting in late July.
The bleak jobs report for May, and Yellen’s speech Monday, seemed to increase doubts about any Fed rate hike this summer.
“She did not address the timing of the Fed’s next gradual move which suggests to us that she is in no hurry,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “We are telling clients to take the summer off. See all of you Fed watchers in September.”
Investors sent stock prices up, reflecting a belief that a June rate hike is now even less likely than it had seemed after Friday’s weak jobs report and that borrowing rates will remain ultra-low.
In her speech, Yellen called the employment report “disappointing” but cautioned that it would be wrong to place too much emphasis on a single monthly report.
Without referring to any particular date, she said, “I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation, provided that labour market conditions strengthen further and inflation continues to make progress toward our 2 per cent objective.”
Inflation, by the Fed’s measure, has remained persistently below its 2 per cent target for inflation.
In light of the uncertainty facing the economy, Yellen stressed, the Fed cannot move on “a preset path.”
“For a time in January and early February, financial markets here and broad became turbulent and financial conditions tightened, reflecting and reinforcing concerns about downside risks to the global economy,” Yellen said.
She said that as a result, Fed officials felt “it would be prudent” to keep rates unchanged at meetings in January, March and April.
In recent months, she said, markets have recovered, and many of the foreign risks have diminished “although some risks remain.” While consumer spending in the United States appears to have rebounded, Yellen said the Fed needs to weigh renewed concerns about the job market.
Balancing optimism with caution, Yellen said she expects the slowdown in job growth to be temporary but said the Fed will need to see further data to confirm that view.
Part of the uncertainty, she said, reflects continued foreign threats including economic challenges in China and an upcoming vote in Britain over whether to leave the European Union.
In a question-and answer-session with the World Affairs Council of Philadelphia that followed her speech, Yellen was asked about fears that the world economy could be headed for a crash if Donald Trump, the presumptive Republican presidential nominee, were to win the White House.
“I’m sorry – I have got nothing for you on that,” Yellen said to laughter from the audience. “We are very focused on doing our jobs. We will just see what happens.”
Afterward, Yellen was to visit a job training centre in Philadelphia. She has stressed during her time as Fed leader her view that it’s critical to provide job training to help lift the unemployed back into the labour market.
Yellen’s speech echoed themes raised in a speech Friday by Lael Brainard, a Fed board member and Yellen ally, who indicated after the jobs report was released that the Fed should be in no hurry to raise rates.
Before the poor jobs number was released, speculation had been growing that the Fed might raise its key policy rate for a second time next week. The Fed had modestly increased its benchmark rate in December from a record low near zero, where it had been since the height of the financial crisis in 2008.
Most economists say they think the Fed will keep rates unchanged next week in light of the jobs report.
Employers added just 38,000 jobs in May, the weakest monthly gain in more than five years.
Job gains have now averaged just 116,000 in the past three months, down sharply from an average of 230,000 in the 12 months ending in April.
As a result, many analysts are pushing back their forecast for the next Fed rate hike to later in the year.