Yellen reiterates cautious approach to hiking rates

In her semi-annual congressional testimony on Tuesday Federal Reserve Chair Janet Yellen said the US central bank would take a cautious approach to hiking interest rates, closely monitoring financial developments.

She said she sees “considerable uncertainty” over the US economic outlook, also highlighting the potential impact of the UK referendum.

Yellen said the pace of improvement in the labour market appears to have slowed, but insisted it was important not to overreact to one or two reports, adding that she reckoned the recent slowing was “transitory”.

“In the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly,” Yellen said. “One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions.”

She added: “Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labour market will strengthen further, and whether inflation will continue to make progress toward our 2% objective.”

Overall, the testimony contained nothing new in terms of hints on the timing of the next rate hike, largely repeating what Yellen said in the post-rate announcement press conference.

Pantheon Macroeconomics said the testimony was “more of the same, mostly, but an acknowledgment that they can’t be certain inflation will rise”.

Chief economist Ian Shepherdson said: “We still think September is the best bet for now, but we’re persuadable that payrolls might not rebound quickly enough to allow them to act until December. And if the UK votes for Brexit, all bets are off.”

As far as Yellen’s Brexit-related comments are concerned, Capital Economics’ chief US economist Paul Ashworth pointed out the UK accounts for only 3.6% of US export, “so it would require a big sustained shock to global financial markets to make this a meaningful event for the US economy specifically”.