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Yellen Provides Yet Another Reason For Fed To Start Normalizing Interest Rates

(Kitco News) - For the second time in as many days, Federal Reserve Chair Janet Yellen highlighted the risk to the current U.S. economic recovery if the normalization of interest rates are delayed.

Yellen’s opening statement in her testimony before the U.S. Congress Joint Economic Committee was similar to her comments made Wednesday at the Economic Club of Washington, in Washington D.C.

She reiterate that a delay in a rate hike could lead to abrupt tightening, that could push the economy into a recession. However, she also highlighted a second risk: “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability,” she said.

Yellen also maintained her caution optimism, highlighted in her remarks Wednesday.

“I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment and a rise in inflation to our 2 percent objective. Although the economic outlook, as always, is uncertain, I currently see the risks to the outlook for economic activity and the labor market as very close to balanced,” she said.

In her first question from the joint committee Yellen was asked about the growing dichotomy between the Federal Reserve’s plan to normalize monetary policy and other central banks like the European Central bank, which took steps earlier in the day to expand its quantitative easing measures.

Yellen noted that the contrasting monetary policies has impacted the U.S. economy as “substantial appreciation” in the U.S. dollar has impacted demand for U.S. made goods; however, she also justified the Fed’s current outlook by noting that domestic spending remains strong and accounts for 85% of economic growth.

Yellen added that the central bank recognizes the impact its policies has on the U.S. dollar but a “gradual path” for interest rates should limit its strength.

Although some banks see rising risks of a recession -- with Citigroup’s chief economist Willem Buiter saying in an interview with Bloomberg that his bank’s team see a 65% chance of a global downturn in global economic growth – Yellen dismissed those concerns during the question and answer period saying that the central bank wouldn’t be contemplating raising interest rates if there was a high risk of the U.S. slipping back into a recession.

She added that although there are risks to the economy, but reiterated that the central bank’s base case is for continued moderate economic growth.

“I can’t put a number on the risk of a recession, but I absolutely wouldn’t see it as anything approaching 65%,” she said.

By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C



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