Interest rates: Fed chief Janet Yellen signals slower pace of US rises

The Fed is analysing the feasibility of negative interest rates

Janet Yellen has sent markets a signal that the American central bank may not push up rates as rapidly as was thought likely at the end of last year.

The Federal Reserve chair, in a statement to Congress, accepted there has been a marked deterioration in the global economic and financial outlook since December, when the Fed hiked rates for the first time since the financial crisis.

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market,” Ms Yellen wrote in a statement. She pointed to threats from China and said financial conditions had become “less supportive” of growth in the world’s largest economy.

Stock markets around the world have witnessed severe sell-offs since the turn of the year on the back of surging concerns about the strength of the Chinese economy and the negative impact of the plummeting oil price. There has been, simultaneously, a rush into safe assets such as sovereign bonds and gold.

Under questioning from Congressional law-makers in her semi-annual testimony to the House, Ms Yellen also revealed the Fed is analysing the feasibility of negative interest rates “in the spirit of prudent planning”. The Japanese central bank and the European Central Bank have both been forced to push rates into negative territory in response to the threat of deflation.

Nevertheless, Ms Yellen stressed that she did not see any reason to emulate Japan and Europe by turning the cost of borrowing negative. And she reiterated that the Fed still anticipates “gradual increases” in its main interest rate over the coming months.

“I don’t think it’s going to be necessary to cut rates. That said, monetary policy ... is not on a preset course, and if it turned out that would be necessary, obviously the FOMC [policymaking body] would do what is needed to achieve the goals that Congress has assigned us,” she said.

“It is clear that the Fed is some way from reversing its current pathway and moving towards an environment where negative rates are deemed necessary. However, it is becoming evident that we may not see another rate hike for quite some time,” said Josh Mahony of IG.

The next meeting of the Fed’s Open Markets Committee is in March, and some members have already downplayed the prospects for another hike in rates.

The most recent economic data from the US has been mixed. GDP growth in the final quarter of the year was slower, but the unemployment rate has continued to fall, dipping below 5 per cent.

Asked whether the December interest rate hike had proved a mistake in light of the current market turbulence, Ms Yellen insisted it had been the right decision. She argued that if the Fed had delayed too long in increasing the cost of borrowing it might have had to tighten monetary policy abruptly to quell inflation.

Some analysts took a different view on the likely timing of rate rises. “By June we expect global economic and financial conditions to have stabilised enough for the Fed to begin raising rates again,” said Paul Ashworth of Capital Economics.