In her first comments since the Fed decided to hold rates steady two
weeks ago, Yellen said inflation has not yet proven durable against
the backdrop of looming global risks to the U.S economy, including
still-low oil prices and concerns over China.
The comments, which boosted stocks and bonds and hit the dollar,
come as healthier measures of U.S. inflation and manufacturing have
prompted some other Fed officials to say another policy tightening
could come as soon as April.
But Yellen was not about to change tack just yet.
"Given the risks to the outlook, I consider it appropriate for the
Committee to proceed cautiously in adjusting policy," she said of
the Fed's policy-making Federal Open Market Committee.
At its March policy meeting, the Fed had nodded to an overseas
slowdown and early-year market turmoil in justifying a pause to its
policy tightening. At the time, Fed officials also downgraded
economic expectations and predicted only about two more rate hikes
this year, down from a December prediction of four.
Yellen said she still expected that headwinds from weak growth
abroad, low oil prices and uncertainty over China would abate and
allow the U.S. recovery to continue alongside a "gradual" series of
rate hikes.
But, she added, the overseas developments "imply that meeting our
objectives for employment and inflation will likely require a
somewhat lower path for (rates) than was anticipated in December,"
when the Fed hiked for the first time in a decade.
In response to her comments at the Economic Club of New York, the
dollar dropped to a one-week low while equities and gold rebounded.
U.S. inflation measures have shown some recent strength, with the
Fed's preferred annual measure flat at 1.7 percent in February,
though still below its target of 2 percent. Another closely watched
12-month measure was up 2.3 percent from a year ago.
That, along with a partial rebound in oil prices and relative
tranquility in global markets, appear to have given some other Fed
officials confidence that the economy can soon absorb tighter policy
after seven years of near zero rates.
San Francisco Fed President John Williams, a close ally of Yellen
who is usually among the core of decision-makers, said earlier on
Tuesday in Singapore that the U.S. central bank should stay on track
with its tightening plan.
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That echoed public comments last week by Atlanta Fed President
Dennis Lockhart, another centrist, and James Bullard of the St.
Louis Fed, who has a vote on policy this year. Those so-called
hawkish views had convinced some investors that the Fed was poised
to raise rates at policy meetings in April or June.
On the other hand, sluggish consumer spending and a large trade gap
last month has slowed the Atlanta Fed's closely watched estimate of
economic growth to only 0.6 percent in the first quarter of the
year.
Diane Swonk, founder of DS Economics in Chicago, said Yellen's "key
points today emphasize her bias to raise rates later, not sooner,
and more importantly, to sideline inflation hawks who want to raise
rates in April."
Futures traders expect the Fed to wait until November to raise rates
another 0.25 percent, from around 0.37 percent now, according to CME
Group.
Yellen, who has run the Fed for more than two years, said
policymakers held rates steady this month in part to "get ahead" of
an overseas slowdown even though the U.S. economy has so far proven
"remarkably resilient."
On a busy day for the world's most influential central bank, Dallas
Fed President Robert Kaplan used similar language to describe his
outlook, saying the Fed should proceed gradually and cautiously on
rate hikes.
(Additional reporting by Jon Herskovitz in Austin, Masayuki Kitano
in Singapore, Jennifer Ablan in New York, and Lindsay Dunsmuir and
Howard Schneider in Washington; Editing by Chizu Nomiyama)
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