The nation's chief economist, Federal Reserve Chair Janet Yellen, warned Congress on Wednesday that U.S. economic growth is at risk due to rising borrowing costs, falling stock prices, China's economic slowdown and a global reassessment of credit risk.
"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said at the start of her two-day testimony before the House Financial Services Committee, noting that "there is always a risk of a recession...the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth."
"Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy," she continued. "This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further."
The Fed lifted its benchmark interest rate in December for the first time in nine years, but Yellen suggested that with the aforementioned economic risks in mind, it was too soon to decide whether to raise rates again at its March 15-16 meeting, according to The New York Times.
Before deciding whether to gradually raise rates, the central bank will need to determine whether the U.S. economy can continue its moderate growth while much of the world struggles. Yellen said the Fed plans to evaluate increased borrowing costs for commercial real estate and other loans. "There's quite a bit of additional data we will want to look at" before the meeting in March, she said, according to USA Today.
Despite the economic uncertainty, Yellen highlighted a few positive economic improvements that could help keep the U.S. on a moderate growth track. These include rising family and wealth incomes, increased domestic spending and accelerated business investment outside the oil sector. The labor market is expected to continue to improve, and rising inflation will eventually hit the Fed's target rate, she said, according to the Times of India.
"Let's remember that the labor market is continuing to perform well. We want to be careful not to jump to a conclusion about what is in store for the economy," Yellen cautioned.
