Fed’s Yellen sticks to her guns as market rout worsens


WASHINGTON (Reuters) – Federal Reserve Chair Janet Yellen returned to Capitol Hill with a brave face on Thursday amid a worsening meltdown on global stock markets and growing skepticism the U.S. central bank can carry out its long-planned pivot to “normal” monetary policy.

Yellen, testifying before the Senate Banking Committee, stressed the bright spots in the U.S. economic recovery while acknowledging that a weakened global economy and steep slide in equity markets is tightening financial conditions faster than the Fed wants.

While Yellen warned against jumping to conclusions about financial threats from abroad, she faced a different financial landscape on Thursday than just a day earlier, when she testified to a House of Representatives committee.

Prices of safe-haven U.S. Treasuries soared in early trading, with the yield on the benchmark 10-year bond falling to its lowest level in more than three years, while stocks plunged in Asia, Europe and the United States.

“We are watching developments very carefully,” Yellen told the panel of senators. “I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don’t die of old age.”

She nodded to concerns of weakness overseas and the downward pressure that falling oil prices were putting on U.S. inflation, which remains below the Fed’s 2 percent target.

“These factors may well influence the balance of risks or the trajectory of the economy and thereby might affect the appropriate stance of policy,” Yellen said. “But at this point it’s premature to make a judgment on that.”

Investors have grown deeply skeptical that the Fed, which raised interest rates for the first time in nearly a decade in December, will be able to continue tightening monetary policy in the face of global warning bells that have grown louder since the beginning of the year.

Futures investors have fully discounted expectations of a rate hike this year, with fed funds contracts showing growing expectations that the central bank would instead need to cut rates as soon as September.

In another sign that central banks’ world-wide efforts to boost growth and lending are falling short, the dollar has tumbled against a basket of currencies including the Japanese yen.

In her testimony, Yellen leaned heavily on the prospect of continued job creation in the United States, rising wages, and an expectation that household spending would keep the economy afloat. But she also acknowledged that global and U.S. market conditions could upend that forecast.

“When Wall Street threatens Main Street, the reality is that even though the Fed doesn’t want to admit that it’s the central bank to the rest of the world too, it is,” said Diane Swonk, economist and founder of Diane Swonk LLC, in Chicago. “What happens abroad matters.”

(Reporting by Jason Lange and Jonathan Spicer; Writing by Jonathan Spicer; Editing by Paul Simao)