Federal Reserve Chair Janet Yellen told Congress on Wednesday global economic troubles and the recent sell-off in stocks could rattle the U.S. economy, raising the prospect of a delay in interest rate hikes. In her testimony before the House Financial Services Committee, Yellen was not explicit on whether the Fed will bump up its benchmark interest rate again in March after lifting it in December for the first time in nine years. But her remarks suggest overseas weakness and market distress could threaten the Fed’s plans to raise the rate gradually this year, including an increase at its March 15-16 meeting.
Yellen said financial conditions have become “less supportive of growth,” citing higher interest rates for riskier borrowers and the strengthening dollar, which has hurt exports, in addition to the fall in stocks. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices could provide some offset,” Yellen said in her semiannual monetary policy report to Congress.
She added, “Foreign economic developments, in particular, pose risks to US economic growth.” She singled out the economic slowdown in China. At the end of the hearing, Rep. John Delaney, D-Md., noted the Fed’s plans for gradual rate increases hinged on its outlook for moderate growth. He asked if that view of the economy has recently been downgraded.
“The answer is maybe, but the jury is out,” Yellen said. She added that increased borrowing costs for commercial real estate and other loans are among the factors the Fed will evaluate. “There’s quite a bit of additional data we will want to look at” before the Fed’s March meeting. In response to lawmakers’ questions, Yellen said the Fed has not seen a slackening in the global economy that’s dramatic enough to warrant the sharp market sell-off. Still, she said, “We are watching very carefully what’s happening in global financial markets.” The market troubles themselves could dent business confidence and growth.