Yellen, speaking to Economic Club of New York, noted in prepared remarks that recent readings on the strength of the US economy since the beginning of the year have been mixed. All major US indexes turned positive after the release of Yellen’s remarks.
In fact, Yellen said that only gradual increases in the federal funds rate are likely to be warranted in coming years, and global developments have increased the risks associated with the Fed’s economic outlook.
On the policy front, Yellen said research suggests that, with a funds rate at zero and increased uncertainty, the best policy is greater gradualism. Still, the Fed can hike if the economy grows faster, she said. But if the economy falters, she added, the Fed can “provide only a modest degree of additional stimulus.”
The Fed chair said “foreign economic growth now seems likely to be weaker this year than previously expected,” but the “overall fallout” of global market developments for the US will most likely be “limited.”
Yellen’s speech comes after a dovish Fed opted to leave interest rates unchanged earlier this month. In its statement, the FOMC noted that “global economic and financial developments continue to pose risks” to US economic growth, and that inflation was “expected to remain low in the near term.”
Still, since then, several Federal Reserve officials have said publicly that a rate hike could be coming soon. Fed watchers had consequently expected Yellen to lean dovish in Tuesday’s speech to battle markets’ expectations of an impending hike.
“The relatively minor (economic) downgrades… suggest that the next rate increase may not be far off provided that the economy evolves as expected,” St. Louis Fed President James Bullard said last week.
Other officials, including Philadelphia Fed President Patrick Harker and the Atlanta Fed’s Dennis Lockhart, have said in recent weeks that the Fed should consider an April hike.
Federal Reserve projections from earlier this month showed that a majority of officials — nine of 17 — expected only two hikes in 2016