Janet Yellen has signalled that the US Federal Reserve will hold off raising rates this month, as she described Friday’s jobs report as disappointing and highlighted uncertainties ahead, including Britain’s referendum on its EU membership.
In a speech in Philadelphia, Ms Yellen described the Federal Reserve’s current monetary policy setting as “generally appropriate”, indicating that the Fed wants to sit tight at its meeting next week but is holding open the possibility of rate rises later should May’s jobs setback prove to be an anomaly.
As recently as two weeks ago, Fed officials were publicly hinting that they were preparing to raise rates for just the second time since the 2008 financial crisis, marking one of the clearest signs of confidence in years in the sustainability of the economic recovery. But the unexpected shortfall in May’s non-farm payrolls threw uncertainty over whether the US was facing a new economic threat or simply a temporary blip.
The Fed chair gave a broadly positive outlook for the US economy, saying it had made impressive gains since the post-crisis recession and that positive forces supporting job growth and inflation should outweigh negative ones, supporting arguments for gradual increases in short-term interest rates.
While Ms Yellen said two weeks ago that she expected a rate move “in the coming months” she did not repeat those words, giving no clear indications as to the likely timing of the next move.
She spelt out “uncertainties” that will hang over policy. These include question marks over how resilient domestic demand will prove, as well as overseas risks from China, which faces “considerable” economic challenges, and Britain, where June’s referendum could have “significant economic repercussions”.
A further uncertainty surrounds inflation, with core price growth hovering below the Fed’s 2 per cent target in recent years and registering a 1.6 per cent year-on-year price growth for April. Ms Yellen added that downward movements in inflation-protected securities had her “close attention”.
As recently as 10 days ago, markets saw a one in three chance of a June rate rise. By lunchtime yesterday, those odds had fallen to one in 50 and futures trading pointed to odds of 25 per cent for a rate rise at July’s meeting, down from 55 per cent before Friday’s jobs report. The dollar index was down 0.4 per cent.
“Yellen has certainly put paid to a rate rise in June but there’s more going on here,” said Luke Bartholomew, investment manager at Aberdeen Asset Management Investment. “She acknowledged that the non-farm payroll numbers last week were bad, but essentially said that one set of bad numbers doesn’t make a poor economy.”
Ms Yellen’s fears will shift the focus to upcoming rates meetings as economists try to glean how soon the Fed will be in a position to resume rises.