US Fed chairwoman Janet Yellen is sensing “considerable uncertainty” with regard to the American economy and warns of “significant repercussions” if Britain votes to break with the European Union.
In a testimony to the US Senate Banking Committee on Tuesday, Fed chair Janet Yellen said the central bank would proceed cautiously with plans to raise interest rates, given lagging US hiring and domestic investment, and with a view to a possible vote in Britain to leave the EU.
Yellen said that US growth had picked up noticeably in the second quarter from the sluggish pace at the beginning of the year. But growth has been uneven, she added, and clear downside risks still pose a threat.
“Considerable uncertainty about the economic outlook remains. The latest readings on the labor market and the weak pace of investment illustrate one downside risk – that domestic demand might falter,” she said.
Among the challenges facing the US economy were a downturn in the global economy, a slowdown of reforms in China and Thursday’s referendum in Britain, which could radically alter Europe’s economic framework if the country chooses to leave the 28-nation bloc.
“One development that could shift investor sentiment is the upcoming referendum in the United Kingdom,” she said. “A UK vote to exit the European Union could have significant economic repercussions.”
Interest rate gamble
Yellen was speaking after the US Fed’s rate-setting Federal Open Market Committee (FOMC) last week turned more dovish in its view of the economy, keeping its benchmark interest rate locked at an ultra-low level between 0.25 and 0.5 percent.
However, she reiterated the FOMC’s expectations that it could increase the rate twice before the end of the year, ending 2016 close to 1.0 percent.
The US Fed chair noted that a number of prominent economists were arguing that slow productivity growth in the United States would continue in the future, dampening overall growth. A possibility, she said, that Fed policymakers “cannot rule out.”
As long as other domestic weaknesses persisted, like slow household formation and business investment, and if global risks remained significant, then the Fed would need to hold interest rates ultra-low “to keep the economy operating near its potential,” she added.
Despite her concerns over the short-term outlook, she reiterated that she and the FOMC were fairly confident in the medium-term outlook that growth would remain moderate, companies would continue to hire workers at a steady pace and inflation, which has been overly weak, would turn upward.
uhe/jtm (AP, AFP, Reuters)