Yellen cautions over exaggerating global impact of Brexit
Fed chief wary about US economic outlook and impact on further rate hikes
US Federal Reserve Chair Janet Yellen sought to avoid taking sides or being overly alarmist about the probable global fallout should Britain exit the European Union, even as she reiterated that such an event could have “significant economic repercussions.”
“I don’t want to overblow the likely impacts,” she told the US Senate Banking Committee on Tuesday, adding that she didn’t expect the US economy to fall into a recession if the UK leaves the EU.
UK citizens go to the polls on Thursday to decide whether to remain in the 28-nation bloc, with surveys suggesting the outcome is too close to call. Billionaire investor George Soros has warned the pound may slump more than 20 per cent against the dollar if supporters of a so-called Brexit prevail.
“I am not attempting to take a stand, they’re going to go to the polls,” Yellen said. “I’m simply saying the decision could have economic consequences that would be relevant to the US economic outlook that we need to monitor carefully.”
European Central Bank President Mario Draghi has been less shy, saying earlier this month that his institution’s view is that “the UK should remain in the European Union.” Bank of England Governor Mark Carney said a vote to leave the EU could cause a UK recession and would be ‘‘the biggest domestic risk to financial stability.” International Monetary Fund Managing Director Christine Lagarde has said that a UK exit would be “negative on all fronts.”
Yellen stressed the uncertainties surrounding the upcoming referendum and said the Fed was ready to act as needed in response.
“This is a unique event that has no close parallel,” Yellen said. “We will closely monitor what the economic consequences would be and are prepared to act in light of that assessment.”
In her prepared opening statement, Yellen said a UK vote to exit “could have significant economic repercussions” and was one reason why the Fed was cautious about raising interest rates now.
Under questioning from lawmakers including Republican Senator Tom Cotton of Arkansas, she was quick to stress that she had said that such an outcome “could” have those types of effects, not that it “would” have them.
She did though say that most analyses suggested Brexit would have negative consequences for the UK with spillovers to the rest of Europe.
Financial markets could see “flight-to-safety flows that could push up the dollar or other so-called safe haven currencies,” she said.
Asked by Republican Senator Dean Heller of Nevada if a Brexit could lead to a US recession, she replied, “I don’t think that’s the most likely case, but we just don’t know what will happen.”
On interest rates, most now expect the number of increases in rates to slip to one instead of two.
“Unless something unexpectedly positive happens, they’re likely on hold for the next couple of meetings,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago.
Yellen sketched a cautious and uncertain view of the economy in testimony before lawmakers in Washington. After her remarks, Tannenbaum was among several economists who said they believe Yellen is among the six Fed officials who last week predicted just one rate increase this year. And that others on the Federal Open Market Committee may soon follow her lead.
If the chair was one of the officials who forecast a single rate increase, that would mean she stepped below the median forecast of the 17 participants published June 15, which was for two hikes. That would be unusual because Fed chairs typically lead from the centre of the committee. They can’t do that if they are outliers, said Laurence Meyer, a former Fed governor who now runs a policy analysis firm in Washington that bears his name.
Yellen can lead the committee to a lower consensus if she thinks that’s the direction it is headed, he said. Nine officials in June expected two rate increases this year, so only three of them would have to lower their forecast for the median to slip to a single move.
“My view, with very strong conviction: She is among the six at one” hike for 2016, Meyer said, referring to the Fed’s quarterly forecasts for the appropriate pace of rate increases. The median of these anonymous quarterly projections, displayed in a so-called dot plot, was halved in March from the four 2016 hikes predicted in December.
Leading up to the release of the May jobs report on June 3, a number of Fed officials made an effort to raise expectations in financial markets for a move either this month or in July, arguing the central bank risked stoking asset bubbles if it waited too long to tighten policy. Another part of their argument was that consumer demand, helped by lower oil prices, would keep supporting growth while exports, business investment and other parts of the economy were uncertain or weak.
The case for a strong consumer took a blow, however, when the Labor Department reported that employers in May created a disappointing 38,000 new jobs -- fewer than in any month since September 2010.
“It seems pretty clear the Fed’s confidence was pretty badly shaken by those recent numbers,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York, who also pegged Yellen as likely favouring one hike this year.
“The latest readings on the labour market and the weak pace of investment illustrate one downside risk -- that domestic demand might falter,” Yellen said Tuesday.
A strong jobs report for June could convince some policy makers that May was something of an anomaly. But Yellen on Tuesday also highlighted worries over longer-term problems in the US economy that are unlikely to reverse any time soon.
Those “headwinds,” like weak productivity growth or tepid business investment, may only slowly fade over time, she said. In that context, there would be little need to raise interest rates quickly so long as inflation remains around the Fed’s 2 per cent goal.
“We cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future,” she said.
Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore, said that while the dots include all 17 FOMC participants, only 10 vote on policy. His guess is that as many as four or five of the officials who forecast one hike this year are voting members.
“There were certainly hints of caution about the outlook and the appropriate pace of rate hikes” in Yellen’s testimony, said Wright. “She wants to nudge that consensus in the direction of slowing the pace of monetary policy tightening. She could well be one of the six who pencilled in just one rate hike in 2016.”