Federal Reserve Chair Janet Yellen clarified before the Senate Banking Committee on Tuesday that she is not taking sides ahead of Britain’s June 23 vote on whether to leave the European Union, but that the U.S. central bank is monitoring the situation carefully.
Yellen was cautious, saying she doesn’t “want to overblow the likely impact” of a Brexit, but she added that the Fed is monitoring the situation closely. She said that whatever British citizens decide will have “economic consequences that would be relevant to the U.S. economic outlook.”
Should Britain decide to exit the EU, Yellen said that markets are likely to react in “a kind of risk-off sentiment … that we might see flight to safety flows that could push up the dollar or other so-called safe-haven currencies.” Yellen said, however, that she does not believe that the U.S. would see a “Brexit-induced” recession.
Global risks, including a potential Brexit, and a U.S. hiring slowdown warrant a cautious approach to raising interest rates as the Fed looks for confirmation that the country’s economic recovery remains on track, Yellen said.
In prepared testimony, Yellen outlined how the central bank was thrown off course within weeks of raising rates last December by a slowdown in domestic growth and international events, including concerns over China’s economy and a further collapse in oil prices.
Some of those clouds remain, Yellen said in comments that seemed to signal no pressing need for the Fed to raise rates. She also said that while low rates can destabilize the financial system, Yellen doesn’t believe that to be the case at the moment.
“I would not at this time say that the threats from low rates to financial stability are elevated. I do not think they are elevated at this time. But of course it is something that we need to watch because it can have that impact,” the Fed chair said.
Before a further tightening of monetary policy, she said, the Fed needs to be sure U.S. economic growth and hiring have rebounded and there is no shock from the outcome of Britain’s June 23 referendum.
“The pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach … remains appropriate,” Yellen said.
“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress,” she said.
With a weak global economy, low U.S. productivity and other factors holding down interest rates in the long run, Yellen said the Fed’s benchmark overnight interest rate is likely to remain low “for some time.”
Current Fed policymakers’ forecasts foresee two rate increases this year and three each in 2017 and 2018, a slower pace from their projections in March.
Job gains averaged 200,000 per month in the first quarter but averaged only about 80,000 in April and May, a possible “loss of momentum,” according to a monetary policy report submitted to Congress in conjunction with Yellen’s appearance.
The Fed chair said, however, “it’s important never to overblow the significance of a single report or a small amount of data,” referencing the disappointing May jobs report.
Yellen’s testimony will be followed by questions from lawmakers about monetary policy, the economy, regulatory matters and other issues.
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