Yellen Dampens Expectations for April Rate Hike

With readings on the U.S. economy "mixed" since the start of the year, the Federal Reserve will continue to "proceed cautiously."
Matthew HellerMarch 29, 2016

The U.S. Federal Reserve will continue to “proceed cautiously” in adjusting monetary policy, with only gradual increases in interest rates warranted amid an “uncertain economic environment,” Fed Chair Janet Yellen said Tuesday.

In some ways, Yellen said in a speech, economic and financial conditions have deteriorated since the central bank raised rates in December. Among other things, she cited the weakness of the global economy and low commodity prices.

“Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December,” she told the Economic Club of New York.

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The Fed said after its March meeting that it expected to implement a rate hike of half a percentage point this year, much less than what it expected at the beginning of 2016. Most investors now predict the Fed will not move to increase rates before June.

Yellen emphasized that caution was especially warranted because, with the federal funds rate so low, the Fed’s “ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

She further explained, “If economic conditions were to strengthen considerably more than currently expected, the [Federal Open Market Committee] could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.”

Readings on the U.S. economy since the start of the year have been “mixed,” Yellen noted, with manufacturing continuing to be hit hard by slow global growth and the significant appreciation of the dollar since 2014. While core inflation was up 1.7% on an annual basis in February, “it is too early to tell if this recent faster pace will prove durable,” the Fed chair cautioned.

“Whatever speculation there was on [an April rate hike] conveyed by previous Fed speakers, that has been blown out of the water very effectively,” Steven Englander, head of rates strategy at Citi, told the Financial Times.

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