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Yellen downplays short-term interest rate increase

WASHINGTON – March 31, 2016 – Federal Reserve Chair Janet Yellen signaled in no uncertain terms Tuesday that she’s in control of U.S. interest rate policy, adopting a decidedly pro-growth stance that pushed stocks to their high-water mark for the year.
The Dow Jones industrial average, which had been down 100 points early, bounced back to end the day up 98 points – and nearly 13 percent from its 2016 low – as investors took comfort from Yellen’s assurance that the Fed will “proceed cautiously” as it considers rate hikes in coming months.
Markets had been jittery since two key Fed officials said last week the central bank could raise its benchmark interest rate as early as April after financial markets settled down recently following a sell-off early in the year.
But Yellen returned to the message she and the Fed expressed after its March meeting: Policymakers are still worried about weakness overseas and its effect on markets, as well as persistently low inflation. That almost certainly means no April hike, and June is a question mark.
“Given the risks to the outlook, I consider it appropriate for the (Fed’s policymaking committee) to proceed cautiously in adjusting policy,” Yellen said in a speech to the Economic Club of New York.
“We see the chair’s comments today as an effort to exert control over the message, and in doing so, filled expectations for policy rate hikes in a decidedly dovish direction,” Barclays economist Michael Gapen wrote to clients.
Yellen acknowledged that stocks and oil prices have rebounded, the dollar has fallen, and corporate borrowing costs have stabilized – all positives for the economy. But she said she’s still worried about a rocky global economy, particularly the risks posed by China’s slowdown, noting that could further disrupt markets. And she said an oil industry slump that has been eased by rising prices could intensify again while the dollar and corporate credit costs rise anew.
In other words, Yellen doesn’t want to react to such a scenario but cushion the potential blow. “Ideally, we want to get ahead of that development,” she said.
She added that risks of raising rates too soon and derailing growth outweigh the hazards of the Fed needing to catch up to a sizzling economy, largely because policymakers have fewer weapons to jolt growth with its benchmark rate still near zero. The Fed raised the rate in December for the first time in nine years.
It was noteworthy that Yellen said the Fed has tools if the economy falters, such as buying bonds to push down long-term rates. But she failed to cite negative rates, which are being used by several countries to jolt growth.
Yellen even cast the Fed as the hero of an economy that has defied the overseas troubles. She said they’ve been offset by investors’ belief the Fed will raise rates more gradually, pushing down long-term rates.
The Fed’s March forecasts showed policymakers expect two rate hikes this year, down from an estimate in December of four.
Copyright © 2016, USATODAY.com, USA TODAY, Paul Davidson  
Source: Florida Realtors Feed

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