Investing.com – Federal Reserve (Fed) chair Janet Yellen reiterated on Tuesday that she expected rate hikes to gradually increase, she admitted that there was considerable uncertainty over the economic outlook.
In testimony to be presented to the Senate Banking Committee, Yellen noted recent improvements in the U.S. labor market, with particular mention of the increase in the participation rate.
With regard to inflationary pressures, the Fed chief stated that “there are some tentative signs that wage growth may finally be picking up.”
Furthermore, Yellen said the Fed was watching to assure themselves that the recent slowdown in employment would, as they expect, be transitory.
With regards to growth, Yellen affirmed that “the available indicators point to a noticeable step-up in GDP growth in the second quarter.”
Among other indicators, she pointed out the significant increase in consumer spending and the recovery in the housing market.
Despite the fact that Yellen restated expectations for inflation to move towards the 2% objective, she expressed concern over the outlook.
“Of course, considerable uncertainty about the economic outlook remains,” Yellen stated.
Among her concerns, she noted the recent weak reading on the labor market and the pace of investment as one of the downside risks that demand might falter.
“Although I am optimistic about the longer-run prospects for the U.S. economy, 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.
Yellen further pointed to vulnerabilities to the global economic outlook as factors that the Fed was taking into account.
Particularly, she referenced the challenges China faces in rebalancing its economy and the June 23 referendum in the U.K. that will decide whether it remains a part of the European Union (EU).
As in her June 15 speech, she warned, “A U.K. vote to exit the European Union could have significant economic repercussions.”
In that light, and with regard to monetary policy, she reiterated that the Fed continued to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate.”
“Of course, the economic outlook is uncertain, so monetary policy is by no means on a preset course and FOMC participants' projections for the federal funds rate are not a predetermined plan for future policy,” she clarified.
Yellen concluded by insisting that the Fed’s monetary policy was data dependent and stronger growth could imply a more rapid increase in interest rates.
“Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate,” she added.
Following the publication of the speech, EUR/USD was trading at 1.1256 from around 1.1244 ahead of the speech, GBP/USD was at 1.4685 from 1.4671 earlier, while USD/JPY was at 104.57 from 104.53 earlier.
The US dollar index, which tracks the greenback against a basket of six major rivals, was at 94.03, compared to 94.13 ahead of the release of the testimony.
U.S. stock markets were flat after the open. The Dow 30 edged up 0.02%, the S&P 500 inched forward 0.03%, while the Nasdaq Composite slipped 0.01%.
Elsewhere, in the commodities market, gold futures traded at $1,269.95 a troy ounce, compared to $1,275.45 ahead of the speech, while crude oil traded at $48.91 a barrel from $49.14 earlier.