Yellen: Too early to determine impact of global developments

Friday, 12 Feb, 2016

The US dollar is now down nearly 8% against the yen from the six-week high of 121.68 reached on January 29, following the Bank of Japan shock decision to adopt negative interest rates.

The dollar hurts USA companies that sell products overseas because it makes those goods more expensive for foreign buyers and that is hurting American manufacturers.

The unemployment rate is now 4.9%, down from 10% in 2009, a level at or close to what the Fed considers full employment. That theoretically would incentivize banks to lend more and could spur them to move money to higher-yielding assets such as stocks, stimulating markets and making consumers feel wealthier so they'll spend more.

Ms. Yellen appeared before the US House Committee on Banking, Housing and Urban Affairs on Wednesday, saying interest rate hikes remain on the table although financial conditions "have become less supportive to growth". She was again questioned about the possibility that the Fed would turn to negative interest rates to further support the economy.

Family incomes and wealth are rising, domestic spending "has continued to advance", and business investment outside the oil sector accelerated in the second half of the year, she said. "Other Fed members have also expressed a cautious tone as a result of the turbulence in financial markets, which has escalated since the beginning of the year", says Maritza Cabezas at ABN Amro. "Against this backdrop, the [Federal Reserve] Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labour market indicators will continue to strengthen". She also noted that the U.S.is vulnerable to a number of challenges, including a stronger dollar and weaker commodities prices. But the recent market turmoil and new data showing slowing US growth at the end of past year have led to speculation Fed policymakers would wait on the next rate hike.

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Yellen warned on Wednesday that the rout, if proven to be "persistent", could change the USA economic outlook - and by implication the Fed's policy plans.

"These factors may well influence the balance of risks or the trajectory of the economy and thereby might affect the appropriate stance of policy", she said. The Fed is studying whether regulation and the prevalence of high-frequency trading are worsening liquidity, according to Yellen.

She reiterated that a strong dollar and low oil prices have been pushing down inflation.

After the Fed began raising rates late previous year, economists widely expected the central bank to continue to boost its benchmark rate gradually but steadily, most likely starting in March.