When the Federal Reserve chair addresses lawmakers this week in Washington, she will have to strike a balance between confident on the domestic economy and increased international risks. Two weeks after officials signaled interest rates may rise more slowly than previously expected, economists and investors will be trying to gauge Yellen’s willingness to delay tightening at the March meeting.
With financial market-turmoil causing uncertainty about the outlook, energy prices damping inflation and the European Central Bank preparing a stimulus boost that may bolster the dollar, the market-implied probability for a rate increase next month has dropped to 2 percent from more than 50 percent at the start of the year.
Yellen is scheduled to appear before the House Financial Services Committee at 10 am but the report is going to be released at 8.30 am. Wednesday and will address the Senate Banking Committee the next day. She’ll have evidence to support the Fed’s view that the U.S. labor market remains solid and wages are showing signs of picking up.
U.S. economic growth slowed in the fourth quarter as businesses cut back investment, raising concern that weakening global trade will damp or even interrupt one of the longest periods of continuous expansion since World War II. Oil prices are close to the lowest level since 2003.
At the heart of the concern about the world economy is China, where policy makers are battling the slowest growth in 25 years, the depreciation in the yuan to the lowest in five years and an equity sell-off that shook global markets, tightening financial conditions from the U.S. to Europe. The Standard & Poor’s 500 Index is down almost 10 percent this year, while the Stoxx Europe 600 Index has lost about 14 percent.
U.S. non-farm payrolls were up 228,000 jobs a month on average in 2015 and rose 151,000 in January. Joblessness dropped to 4.9 percent, a level the Fed considers equivalent to full employment. Average hourly earnings rose the most in a year -- good news for officials anxious for inflation to accelerate toward their 2 percent goal.
In Europe, the ECB is struggling to sustain a fragile economic recovery and has held out the prospect of more stimulus as early as March. Any cut in interest rates or an expansion of the 1.5 trillion-euro ($1.6 trillion) quantitative-easing program will probably push up the dollar, creating a similar effect as Fed policy tightening.
The challenge for Yellen is whether the market can let the policy work or in another way, how to balance between erasing the bubble and preventing a global contagion.