The US economy and fiscal policy face an uncertain path under the administration of Donald Trump, Janet Yellen warned on Tuesday as she declared “monetary policy is not on a preset course” but said it would be “unwise” to raise rates too slowly.
Testifying before Congress on Tuesday, the Federal Reserve chair painted a picture of an economy with accelerating growth, higher inflation and a robust labour market that has generated some 16m jobs since its post-crisis trough in early 2010.
That improving economic picture, she said, justified the December move by the policy-setting Federal Open Markets Committee to raise interest rates for only the second time in the past decade and expectations that it would have to continue to increase its target rate gradually in the months to come.
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she said.
The US dollar rose as traders focused on Mrs Yellen’s remarks about a continued tightening of monetary policy. The greenback added 0.4 per cent against a basket of six major global currencies, reversing a loss of as much as 0.3 per cent earlier in the day.
In prepared remarks for her Valentine’s Day testimony Ms Yellen also struck a note of caution about the new administration and expectations that its plans for tax cuts, infrastructure spending would lead to looser fiscal policy and more rapid growth.
“Considerable uncertainty attends the economic outlook,” she said, pointing to “possible changes in US fiscal and other policies” as one of the main sources of that uncertainty alongside questions about productivity growth and international developments.
The Fed policymakers reiterated earlier this month that they expected “the evolution of the economy to warrant further gradual increases in the federal funds rate”, Ms Yellen pointed out, and expected the “neutral” policy rate to rise over time as the economy recovers.
However, any future moves, Ms Yellen said, would depend on continuing progress in both US employment and inflation, which at 1.6 per cent remains below the Fed’s 2 per cent target rate.
“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee.
It is too early to know what policy changes will be put in place or how their economic effects will unfold
“Changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”.
Beyond the economic outlook, Ms Yellen was expected to face questions from senators about the administration’s plans to repeal the Dodd-Frank reforms introduced after the 2008 crisis. Those efforts have been drawn into focus by Mr Trump’s signing of an executive order to repeal many of the legislation’s provisions as well as the announcement last week by Daniel Tarullo, the Fed’s top regulatory voice, that he would be stepping down in April.
Despite her focus on the US economy’s uncertain future, Ms Yellen reinforced the relative rude health of the economy that Mr Trump has inherited from President Barack Obama. While Mr Obama’s two terms in office were shadowed by the economic collapse following the 2008 global financial crisis and the difficult recovery from it Mr Trump is inheriting a growing economy nearing full employment.
The US, Ms Yellen pointed out, added an average 190,000 jobs per month over the second half of 2016 as growth accelerated, leading to an unemployment rate that at 4.8 per cent in January was “more than 5 percentage points lower than where it stood at its peak in 2010” and was now in line with Fed policymakers’ estimates for “a longer-run normal level”.
Those gains in the labour market, Ms Yellen said, were being accompanied by other signs of a stronger economy with consumer spending — one of the main engines of the US economy — continuing to “rise at a healthy pace” thanks to rising incomes and home prices and low interest rates.
But she also cautioned that while business confidence and investment had improved in recent months the economy still faced potential headwinds. Weak foreign growth and a stronger dollar had put a damper on manufacturing output, she said. Housing construction was also growing only modestly with higher mortgage rates due in large part to the Fed’s recent move likely to “impart some restraint”.
Additional reporting by Adam Samson
Sample the FT’s top stories for a week
You select the topic, we deliver the news.