Federal Open Market Committee Advocates Caution Over Interest Rates

Forex traders waiting for US Federal Reserve Chair Janet Yellen’s speech about the pace and direction of prospective US interest rate hikes need wait no longer. Shifting gear somewhat from the hawkish tones struck recently by Fed officials, Ms Yellen said from New York that, given the current outlook, the central bank must proceed cautiously.

She referred to inflation expectations drifting lower, adding that it was “too early to tell” if core inflation’s recent rise was sustainable. On the issue of economic outlook, Ms Yellen acknowledged that global risks continued to exist, although risk to the US from overseas is likely to be limited.  Even if rates were to return to zero, she said, the Fed still had tools that would allow it to give more accommodation.


Ms Yellen added that global developments had increased the risks to the economic outlook, with the result that the Federal Open Market Committee had “decided to leave the stance of policy unchanged in both January and March.”


She said: “… if foreign developments were to adversely affect the US economy by more than I expect, then the pace of labour market improvement would probably be slower, which would also tend to restrain growth in both wages and prices. But even if such developments were to occur, they would, in my view, only delay the return of inflation to 2 per cent, provided that inflation expectations remain anchored.”


The Federal Open Market Committee has, Ms Yellen added, decided not to embark on a preset course of tightening and will instead adjust policy as required by its data-dependent approach.


The Forex market made a dovish interpretation of Yellen’s comments, with the result that the greenback tumbled sharply as stock indexes surged. Expectations amongst traders of an imminent rate hike have rapidly diminished.