Janet Yellen says Federal Reserve will "proceed cautiously" on interest rate rises

Janet Yellen Testifies Before House Financial Services Committee
Source: Getty

Rate-setters at the US Federal Reserve will "proceed cautiously" when they come to decide their policy actions in the coming months.

Federal Reserve chair Janet Yellen reiterated the view that the outlook for economic growth and inflation had weakened since the start of the year.

She told an audience at the Economic Club of New York:

Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric.

If economic conditions were to strengthen considerably more than currently expected, the FOMC 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

The Fed has been beset by division among its rate-setters over how to respond to the turmoil which has afflicted the global economy since the start of the year.

Read more: Yellen: we're taking a look at negative interest rates

Some members of the Federal Open Market Committee (FOMC), including the president of the St. Louis Federal Reserve, James Bullard, have indicated they believe the US economy is strong enough for a second rate rise when the FOMC next meets in late April or June. It rose interest rates for the first time since the financial crisis in December.

In its latest economic forecasts the average number of interest rate hikes expected this year had fallen to two from four in December. Meanwhile, the average forecast for inflation excluding energy and prices is for it to hit 1.6 per cent by the end of this year. It rose to 1.7 per cent in January and stayed there last month.

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