In her prepared statement to Congress, Yellen looked to have poured cold water on expectations of another rate rise in March, pointing out that US financial conditions have “recently become less supportive of growth”.
Citing equity price declines, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar as headwinds, she said, should they prove persistent, they “could weigh on the outlook for economic activity and the labour market.
In the next breath, however, she added: that the FOMC still maintains that low oil prices, ongoing employment gains and rising real wages should help support growth and that “global economic growth should pick up over time, supported by highly accommodative monetary policies abroad.
“Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labour market indicators will continue to strengthen.
However, she was also quick to point to the broader uncertainties engulfing the globe, and the risks they pose to US economic growth, in particular China.
“Although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy.
Market reaction to the news was fairly muted.
Sanjiv Shah, Sun Global Investments, CIO said: “The Fed is determined to carry out its plan to raise interest rates in 2016 but it is clear that these plans could quite easily be derailed if market turmoil persists. The tone and emphasis is more bearish than was expected and the 2 year Treasury yield has risen by 2bp to 0.74% since the statement was released.”
Joshua Mahony, market analyst at IG added: “It is clear that the Fed is some way from reversing its current pathway and moving towards an environment where negative rates are deemed necessary. However, with global stock markets crashing, global growth of a slowing path and financial conditions tightening as a result, it is becoming evident that we may not see another rate hike for quite some time.
