Well Federal Reserve Chair Janet Yellen has spoken. In both her opening statement and while answering questions from the House Financial Services committee she played down the risk of a U.S. recession and said she doesn’t foresee needing to cut interest rates, which the Fed raised two months ago for the first time in eight years.
“While global challenges may curb growth, we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy,” she told members of the committee during her semi-annual grilling. “The labor market is continuing to perform well, to improve, and I continue to think that the factors holding down inflation are transitory.”
Many, if not all of Fed Chair Yellen’s remarks were intended to ease concerns on Wall Street. Ease Wall Street’s concerns that rapid rate hikes would add to the already beaten up markets caused by the big drop in oil prices and the dismal economic growth in China.
“We certainly recognize that global market developments bear close watching,” Yellen said. She feels that falling prices for oil and other raw materials could hurt commodities exporters and eventually reduce demand overseas for goods produced here in the U.S. “Financial conditions have become less supportive to growth.”
When asked if she felt we could possibly go to negative interest rates, she discouraged that idea by saying she didn’t know if the Fed could do that legally. Which I found very strange because I know her Fed Chair predecessor Ben Bernanke was considering that in 2010. After all the talk about rates, the Fed chair didn’t rule out another rate increase in March that would add to the 25 basis-point hike in December. In December the members of the Fed’s monetary policy committee said “rates might increase as many as four times this year.” Since than (because of oil and China) the market has been hell, causing speculation among Wall Street insiders that the central bank might raise rates only once or not at all this year.
When asked about lowering rates back to near zero, she said “I do not expect that the Federal Open Market Committee is going to be soon in a situation where it’s necessary to cut rates. But that said, if it turned out that that would be necessary, the FOMC would do what is needed to achieve the goals that Congress has assigned us.”
After a 4 hour grilling, are rates going up or down? Who knows!
Being the Federal Reserve Chair is a very tough job! And I know Janet Yellen is a brilliant person. I just hope she’s not in over her head. This world is a mess. Be careful!
The market opened over 100 points and was up as much as 185. There was a sell off into the close and the Dow closed down 100!
Steve
The Options Coach
It always amazes me how illusive and inaccurate these FED chairs are when it comes to their explanations regarding the state of the economy. It’s equivalent to the verbal fabrications flowing from many State of The Union speeches (especially the latest given by BHO).
The following quote was very troubling in that it proves the FED is running out of the tools they consider necessary to bolster a faltering economy and avoid another financial crises:
When asked about lowering rates back to near zero, she said “I do not expect that the Federal Open Market Committee is going to be soon in a situation where it’s necessary to cut rates. But that said, if it turned out that that would be necessary, the FOMC would do what is needed to achieve the goals that Congress has assigned us.”
So when is “soon in a situation”? And how much lower can they go then zero? At some point government intervention will not be able to offset the impact of a global financial crises that will make 2008 look like a warm up.
Game over!
Steve, I like your thought process. Now is a good time to be sitting in cash on the sidelines due to the havoc in the world economy. Currency markets have been a clear indicator of the volatility. Commodity markets have been hit hard as well over the past 6 months. I don’t see any way Yellen is going to have a basis to increase rates in the near future. Positioning yourself from a cash perspective for future opportunities I think is the way to go for now. Best wishes, Tom