Janet Yellen: US Financial Conditions Become Less Supportive of Growth

The head of the Federal Reserve, Janet Yellen, has warned financial conditions in the US had become “less supportive” of growth.

The Fed released Janet Yellen’s prepared comments ahead of her latest appearance before Congress.

The central bank raised interest rates by 0.25% for the first time in nine years in December 2015.

In the prepared testimony, Janet Yellen said: “Financial conditions in the United States 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.

“Against this backdrop, the [Federal Reserve] 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 labor market indicators will continue to strengthen.”

Janet Yellen added China’s “unclear” currency policy was fuelling global stock market volatility.

She said the decline in China’s currency, the yuan, had “intensified uncertainty about China’s exchange rate policy and the prospects for its economy”.

“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.”

While Janet Yellen said she was confident China’s economy was not facing a “hard landing”, the Fed chief said the overall uncertainty created by the world’s second-largest economy was behind some of the steep falls in global commodity prices, which in turn were creating stress for exporting nations.

Janet Yellen added that “low commodity prices could trigger financial stresses in commodity-exporting economies” as well as in commodity-producing firms around the world.

If such problems materialized, she added, “foreign activity and demand for US exports could weaken and financial market conditions could tighten further”.

Following her prepared testimony Janet Yellen responded to questions in Congress about the new way in which the central bank implemented its last rate rise.

Congress is concerned the new policy benefits the country’s banks more than the American public, because banks receive a higher interest rate on the reserves they hold at the Fed.

Supporters of the interest rate on excess reserves (IOER) policy say it allows the Fed to maintain control of the market.

Janet Yellen has called the policy a “traditional tool” for adjusting rates, citing its use by other central banks around the globe. The Fed was given the power to offer IOER by Congress in 2006.

US stock markets opened higher after the comments.

Recent stock market turmoil has prompted most Wall Street analysts to push back their forecast of when the next US Federal Reserve interest rate rise will occur, from March to June at the earliest.

US stock markets have taken a battering in recent weeks over concerns caused by the economic slowdown in China, which has in turn led to lower commodity and oil prices, while the weaker yuan has made Chinese exports cheaper than those from the US.

The Dow Jones is down some 8.5% since the start of the year, the S&P 500 is down more than 9% since January 1 and the NASDAQ is lower by 14%.

US economic growth in the last three months of 2015 also slowed dramatically, to 0.7% compared with the same period a year earlier, falling from 2% three months earlier.