Tighter financial conditions could weigh on economic outlook, Fed's Yellen says

Financial conditions in the US had become "less supportive" of economic growth and could weigh on the outlook should they persist, the chair of the US Federal Reserve, Janet Yellen, would tell Congressmen on Wednesday, according to the prepared remarks for her testimony.

There was still room for further sustainable improvement in labour market conditions too, the Fed's chief said.

Furthermore, recent developments in economies overseas posed risks to the US economy.

In her speech, Yellen specifically singled out uncertainty about China's exchange-rate policy.

Nevertheless, the head of the US central bank would place particular emphasis on the fact that the labour market had "improved substantially", alongside a continued moderate expansion in economic activity, with gross domestic product estimated to have grown at a 1.75% pace over 2015.

Likewise, inflation expectations were judged to have remained stable, despite the fall in market-based measures of inflation compensation to historically low levels.

As a result of all of the above, rate-setters in the US expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and would be "data-dependent".

"At present, the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the labor market and inflation and the balance of risks to the outlook," she said.

"Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with the attainment of our objectives over time."

Commenting on Wednesday's speech, Ian Sheperdson, chief economist at Pantheon Macroeconomics, said: "Fed Chair Yellen's Testimony does not close the door to a March rate hike, given that the meeting is still more than a month away, but if the committee loses its nerve in the face of continued market volatility, no-one will be able to say they are surprised. [...]

"The March decision will depend on the labor market data, which in all likelihood will signal the need for higher rates, and a host of market developments and non-labor data, which likely will not. We're sticking to our 55/45 call in favor of a March hike, but it will be close either way."

As of 14:08GMT the Footsie was higher by 48.76 points to 5,680.91, while the yield on the benchmark 10-year Gilt edged higher by one basis point to 1.43%.