Tag Archives: Federal Reserve

Fed officials say 2-3 rate hikes possible this year

Federal Reserve building in Washington

WASHINGTON (Reuters) – The U.S. Federal Reserve could still raise interest rates two or three times this year and June remains on the table, two Fed policymakers said on Tuesday.

Atlanta Fed President Dennis Lockhart said he still assumes there will be two to three rate hikes this year and that markets are more pessimistic on the U.S. economic outlook than he is.

“I think it certainly could be a meeting at which action could be taken,” Lockhart said in reference to the Fed’s next policy meeting on June 14-15.

San Francisco Fed President John Williams, who was speaking with Lockhart at a joint appearance in Washington, agreed that two to three interest rate hikes this year “seems reasonable” and that there will be a lot more economic data to parse between now and mid-June.

“I think incoming data have actually been quite good and reassuring,” Williams said.

The U.S. central bank has held rates at a target range of 0.25 to 0.50 percent since moving from near zero in December.

A key inflation index showed U.S. consumer prices in April notched their biggest increase in more than three years.

Prices for contracts on Fed funds futures suggest investors see only an 11 percent chance of an interest rate increase in June. Rather, investors expect the first and only hike this year to come in November.

(Reporting by Lindsay Dunsmuir and Jason Lange; Editing by Chizu Nomiyama and David Gregorio)

Fed’s Kaplan says may back June or July rate rise

A guard walks in front of a Federal Reserve image before press conference in Washington

By David Milliken and Marc Jones

LONDON (Reuters) – Dallas Federal Reserve President Robert Kaplan said on Friday that he could back a rise in U.S. interest rates as soon as June or July, if U.S. economic data firms up as he expects.

Kaplan, who does not currently vote this year on the Federal Open Market Committee, said interest rates should rise gradually but that financial markets had underestimated the Fed’s readiness to follow December’s rate rise with another move.

“We’ll see how the second quarter unfolds but I think the market may well be underestimating how soon we might move next,” Kaplan said at an event in London hosted by think-tank OMFIF.

“If the second-quarter data is firming you will see me advocating in the not too distant future that we try to take the next step. We will see what meeting, whether that means June or July or what else. I’d like to see it happen,” he told reporters after.

The Fed kept rates on hold at 0.25-0.5 percent this week and signaled it was in no rush to raise them again soon, citing slowing economic activity despite an improved labor market.

The message pushed the dollar sharply lower and helped drive oil prices to their highest so far this year.

For economists it also added to a feeling that has been growing since the start of the year that U.S. rates may not be set to diverge from those in Europe and Japan as much as many had predicted.

Kaplan’s remarks were the first from a U.S. policymaker after this week’s Fed rate decision, and appeared calculated to drive home a more hawkish message on rates.

If GDP growth rebounds this quarter, as expected, “I personally will be moving toward advocating some removal of accommodation sooner rather than later,” Kaplan said in a Bloomberg TV interview after his speech.

“I will also advocate that we take these steps in a gradual and patient manner,” he said, expressing a cautious view on normalizing rates held widely at the Fed.

LOWER PEAK

Kaplan also said he expected rates to peak at a lower level than seen historically.

In forecasts released last month, all but one of the Fed’s 17 policymakers said they believe it will be appropriate to raise rates at least twice this year. Traders are betting on just one hike.

The Fed raised rates last December for the first time in nearly a decade but has kept them unchanged since then over worries about global growth and low inflation.

Kaplan forecast U.S. gross domestic product growth this year at 2.0 percent, slightly faster than he projected last month.

U.S. employers can continue to add jobs at a “healthy” pace without overheating the economy, largely because of a global labor surplus putting downward pressure on inflation, he said.

But Kaplan also expressed confidence that inflation, which has undershot the Fed’s 2.0 percent target for years, will return to that level over the medium term as the downward pressure from a strong U.S. dollar and cheap oil abates.

He told reporters he would be looking to see whether other economic indicators caught up with measures of a labor market that was rapidly closing in on full employment.

“It’s going to have to get reconciled one way or the other. It’s either going to happen with the PCE (inflation) and other numbers firming, or other numbers weakening,” he said.

“We still believe the consumer in the U.S. is strong and has the capacity to be spending.”

The state of the debate ahead of Britain’s June 23 referendum on whether to stay in the European Union could also affect Kaplan’s view about a Fed hike on June 15.

Sterling could suffer a “sudden depreciation” if Britain left the EU, he said, with ripple effects for the world economy.

(Reporting by Marc Jones, David Milliken and Ann Saphir; Editing by Clive McKeef and James Dalgleish)

U.S. Federal Reserve set to keep rates unchanged

Federal Reserve Chair Janet Yellen holds a press conference in Washington

By Lindsay Dunsmuir

WASHINGTON (Reuters) – The U.S. Federal Reserve is expected to keep interest rates unchanged on Wednesday as it continues to monitor the impact from weakening global growth but may seek to signal to markets it is determined to resume policy tightening this year.

The Fed has held its overnight lending rate for banks at a target range of between 0.25 and 0.50 percent since it lifted the benchmark interest rate for the first time in a decade from near zero last December.

Since then the Fed has signaled more caution, despite the U.S. economy’s relative strength, as concerns a slowing China would depress global growth sparked steep stock price declines and tighter financial market conditions early in the year.

Fed officials reconvened Wednesday morning as scheduled for the second day of the two-day meeting, a Fed spokesperson said. A policy decision statement is due to be released at 2 p.m. EDT (1800 GMT). Fed Chair Janet Yellen is not scheduled to hold a press conference.

Markets have turned up since the last rate decision in March. The S&P 500 [.SPX] has risen more than 14 percent since mid-February. China’s economy has also shown more positive signs, growing at a 6.7 percent pace in the first quarter.

A Reuters poll of more than 80 economists showed expectations were for two rate increases this year, with the possibility the Fed will hike in June.

Additionally, some of the pressures that have kept inflation lower than the Fed would like have abated. Oil prices have rallied, with the Brent benchmark crude [LC0c1] up 20 percent to around $44 a barrel since the Fed’s December rate hike, while the dollar has dropped around 4 percent against a basket of currencies during the same period.

Those factors may allow the Fed to reinstate a balance of risks assessment in its statement, most likely a description of the risks to the U.S. economic outlook as “nearly balanced.”

Such phrasing is usually seen as prerequisite to policymakers even considering another rate rise. However, the U.S. central bank has tried to move away from forward guidance as it implements rate hikes.

The Fed may also acknowledge the recent improved market indicators by dropping or softening its March warning that global economic and financial developments “continue to pose risks.”

“If anything, Fed officials will likely want to encourage markets to price in more tightening than is being priced in currently,” said Jim O’Sullivan, an economist at High Frequency Economics, in a note.

Investors currently see zero chance the Fed will raise rates at this week’s meeting and see a 23 percent probability of a hike in June, according to an analysis of Fed Fund futures by the CME Group.

EYE ON THE DATA

The Fed may be wary of making too strong a judgment on the resilience of the U.S. economy come June until it has more data.

The global situation has already caused the Fed rate setters to dial back their estimates on the number of rate rises this year. Predictions from policymakers now show two, compared to four last December.

Other major central banks are grappling with ways to deal with lackluster growth. The Fed remains concerned that with interest rates still close to zero it would have to rely on more unconventional policy tools should the economy slow.

Last week the European Central Bank kept its main refinancing rate at zero and its bank overnight deposit rate in negative territory.

The Bank of Japan could cut its rates further into negative territory when it meets on Thursday.

U.S. data in the pipeline includes the initial estimate of first-quarter gross domestic product growth on Thursday, which is expected to be weak. Economists polled by Reuters predict 0.7 percent growth for the first quarter. The Fed will look for signs over the next few weeks that the economy is accelerating for the second quarter.

Another strong monthly jobs report in just over a week’s time could assuage concerns as would evidence a recent uptick in inflation is being maintained.

As such if there isn’t a balance of risks reinserted into April’s statement, “Fed officials could still use their speeches to manage market expectations higher,” if they decide on June, said Sam Bullard, an economist at Wells Fargo.

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)

Interest Rates Unlikely to Raise Yet

Federal Reserve building in Washington

By Jason Lange and Lindsay Dunsmuir

WASHINGTON (Reuters) – The Federal Reserve appears unlikely to raise interest rates before June amid widespread concern at the U.S. central bank over its limited ability to counter the blow of a global economic slowdown, minutes from the Fed’s March 15-16 policy meeting suggest.

The minutes released on Wednesday showed policymakers debated whether they might hike rates in April but “a number” of them argued headwinds to growth would probably persist, with many arguing they should be cautious about raising rates.

“Participants generally saw global economic and financial developments as continuing to pose risks,” according to the minutes.

Policymakers had signaled at the close of the March meeting that they expected to raise rates twice in 2016 but the timing of the hikes still appears up in the air.

According to the minutes, many Fed members said they were concerned that the central bank had limited firepower to respond to shocks from abroad because interest rates are already so close to zero.

“Many participants indicated that the heightened global risks and the asymmetric ability of monetary policy to respond to them warranted caution,” the minutes stated.

Investors have held doubts the Fed would raise rates at all this year and the minutes did little to shift bets on the path of policy.

Prices for fed futures contracts suggested investors still saw the chance of a rate hike in December as just better than even, and they saw virtually no chance of an increase at the April 26-27 policy meeting, according to the CME group.

“Resistance to near-term action is still quite entrenched,” said Ian Shepherdson, an economist at Pantheon Macroeconomics.

According to the minutes, several of the central bankers said elevated risks faced by the U.S. economy meant that raising rates in April “would signal a sense of urgency they did not think appropriate.”

A small minority indicated a rate hike might be warranted when the Fed meets at the end of April. After that meeting, policymakers next convene June 14-15.

Policymakers had signaled in December that four rate increases were likely in 2016, and the minutes of the March meeting highlighted the consensus within the Fed around a cautious outlook for the economy.

PROCEEDING WITH CARE

Fed chief Janet Yellen said on March 29 the U.S. central bank should “proceed cautiously” in raising rates, a view Fed Governor Lael Brainard pushed late last year which has been recently embraced by policymakers including St. Louis Fed President James Bullard, who had previously warned the Fed might hike too slowly.

Bullard said on Wednesday that economic data has been mixed since the March meeting, which could make it difficult for the Fed to raise rates this month.

The Fed left its target interest rate for overnight lending between banks at between 0.25 percent and 0.5 percent in March and in January after December’s hike which ended seven years of near-zero rates.

Global financial markets have been volatile since August amid concerns a slowing Chinese economy could drag heavily on global growth. Expectations the Fed would outpace other central banks in raising rates also tightened financial conditions by leading the dollar to strengthen in 2014 and 2015, though the consensus for caution has helped stabilize the U.S. currency.

At the same time, an inflation index closely followed by the Fed has begun to rebound, although policymakers were divided in March over whether the increase would prove lasting.

“Some participants saw the increase as consistent with a firming trend in inflation. Some others, however, expressed the view that the increase was unlikely to be sustained,” according to the minutes.

(Reporting by Jason Lange and Lindsay Dunsmuir in Washington; Editing by Andrea Ricci)

China central bank to Federal Reserve: A little help, please?

WASHINGTON (Reuters) – Confronted with a plunge in its stock markets last year, China’s central bank swiftly reached out to the U.S. Federal Reserve, asking it to share its play book for dealing with Wall Street’s “Black Monday” crash of 1987.

The request came in a July 27 email from a People’s Bank of China official with a subject line: “Your urgent assistance is greatly appreciated!”

In a message to a senior Fed staffer, the PBOC’s New York-based chief representative for the Americas, Song Xiangyan, pointed to the day’s 8.5 percent drop in Chinese stocks and said “my Governor would like to draw from your good experience.”

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil. The Chinese central bank and the Fed had no comment when reached by Reuters.

In a Reuters analysis last year, Fed insiders, former Fed employees and economists said that there was no official hotline between the PBOC and the Fed and that the Chinese were often reluctant to engage at international meetings.

The Chinese market crash triggered steep declines across global financial markets and within a few hours the Fed sent China’s central bank a trove of publicly-available documents detailing the U.S. central bank’s actions in 1987.

Fed policymakers started a two-day policy meeting the next day and took note of China’s stock sell-off, according the meeting’s minutes. Several said a Chinese economic slowdown could weigh on America.

Financial market contagion from China was one of the reasons cited by the Fed in September when it put off a rate hike that many analysts had expected, a sign of how important China has become both as an industrial powerhouse and as a financial market.

NO SECRETS

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood major central banks.

The exchanges also show that while the two central banks have a collegial relationship, they might not share secrets even during a crisis.

“Could you please inform us ASAP about the major measures you took at the time,” Song asked the director of the Fed’s International Finance Division, Steven Kamin in the July 27 email.

The message registered in Kamin’s account just after 11 a.m. in Washington. Kamin quickly replied from his Blackberry: “We’ll try to get you something soon.”

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 percent on Oct. 19, 1987.

Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports that were attached to the email.

All of the attached documents had long been available on the Fed’s website and it is unclear if they played a role in shaping Beijing’s actions.

Kamin’s documents detail how the Fed began issuing statements the day after the market crash, known as Black Monday, pledging to supply markets with plenty of cash so they could function.

By the time Song wrote to Kamin, China had spent a month fighting a stock market slide and many of the actions taken by the PBOC and other Chinese authorities shared the contours of the Fed’s 1987 game plan.

DESPERATE MEASURES

The July 27 plunge in the Shanghai Composite Index was the biggest one-day fall since 2007 and by then the market had lost nearly a third of its value over six weeks.

China’s central bank had already cut interest rates on June 27 in similar fashion to the Fed’s swift move to ease short-term rates in 1987.

Song told Kamin the PBOC was particularly interested in the details of the Fed’s use of repurchase agreements to temporarily inject cash into the U.S. banking system in 1987.

The PBOC had increased cash injections in June and ramped up repurchase agreements in August as stocks continued to slide. The PBOC also eased policy on Aug. 11 by allowing a 2 percent devaluation in the yuan currency.

As Song and Kamin exchanged messages on July 27 and 28, other Chinese authorities were busy trying to contain the crash.

China’s securities regulator said on July 27 it was prepared to buy shares to stabilize the stock market and that authorities would deal severely with anyone making “malicious” bets that stocks would fall.

In 1987, the Fed contacted banks directly and encouraged them to meet “legitimate funding needs” of their customers, according to Kamin’s email to Song.

In addition to its pledges and cajoling, the U.S. central bank in 1987 eased collateral restrictions on Wall Street and tried to calm markets by intervening in trading earlier than normal. The U.S. economy continued to grow, eventually entering recession in 1990.

The central bank in Beijing does not have as free a hand to conduct policy as does the Fed, which answers to the U.S. Congress but operates independently from the administration.

The PBOC governor Zhou Xiaochuan implements policies ultimately decided by political leaders in Beijing and lacks the authority to lead debate or shed light on decision-making.

China’s vice finance minister told Reuters last year Chinese supervisors needed to learn from countries like the United States.

Premier Li Keqiang said last month China’s regulators did not respond sufficiently but China had fended off systemic risks.

U.S. central bankers say their relative transparency helps their effectiveness and legitimacy, but open records laws also make Fed officials cautious about their communications, much of which must be made public when requested. Fed Vice Chairman Stanley Fischer has said transparency makes it harder for policymakers to have informal discussions.

Kamin pointed out in his email that everything he was sending was publicly available.

“I hope this is helpful,” he said.

(Reporting by Jason Lange in Washington; Additional reporting by Kevin Yao in Beijing; Editing by Tomasz Janowski)

More cautious Fed holds rates steady, now sees only two rate hikes this year

WASHINGTON (Reuters) – The Federal Reserve has reached a virtual consensus to raise interest rates twice during the remainder of the year as the U.S. economy continues to muster strong job growth despite global weakness.

Fresh policy and economic projections from Fed officials on Wednesday showed a clear majority expect two quarter-point hikes by the end of 2016, absent a major shock to the economy or job market, while 12 of seventeen expect either two or three hikes.

In keeping its key overnight interest rate unchanged in the current range of 0.25 percent to 0.50 percent, the Fed balanced what it described as “strong job gains” against the fact that “global economic and financial developments continue to pose risks.”

But the clustering of opinion among Fed policymakers, which represented a sharp narrowing of rate projections since the last round of forecasts in December, shows a balance emerging between the need to recognize that continued U.S. economic strength warrants higher rates with a desire to stick with a go-slow approach given the uncertainties of the global economy.

It is a situation not without inconsistency: the Fed’s official policy statement said inflation had ticked up, policymakers’ individual inflation forecasts ticked down, and Fed Chair Janet Yellen told reporters she was not sure what the data indicated.

Headline inflation has been rising, but “I am wary and have not yet concluded that we have seen a significant uptick that will be lasting,” Yellen said at a press conference following the Fed’s two-day policy meeting.

Yellen also said the U.S. economy had proved “very resilient in the face of shocks,” but noted that global risks were still too apparent to hike rates at this time. She said that “caution” would provide more certainty the U.S. economic recovery would be sustained.

The half-empty half-full approach avoids any clear resolution of a disagreement at the highest levels of the central bank over how to interpret recent data. Yellen indicated as much, noting that the policy-setting committee had for the second meeting in a row been unable to agree on summary language about the overall risks faced by the U.S. economy.

A risk assessment has been a staple of Fed statements, used as a way to signal the direction of policy.

“We decline to make a collective assessment,” Yellen said. “Some participants see them as balanced. Some see them as weighted to the downside.”

She stressed the uncertainty facing the committee, with its members poised to hike rates even as they cut the U.S. growth forecast and slowed the expected pace of monetary tightening.

Overall, “you have seen a shift in most participants’ path of policy. That largely reflects a somewhat slower projected path for global growth,” Yellen said. Interest rates will move higher if the Fed’s baseline forecast proves accurate, she added, “but proceeding cautiously will allow us to verify” that the economic recovery remains on track.

CAUTIOUS APPROACH

In its policy statement, the Fed noted the risks still emanating from overseas, which Yellen said included renewed signs of weakness in Japan and Europe, and the ongoing slowdown in China.

“Our first take on this is that it probably leans slightly more dovish, relative to expectations,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

The dollar fell sharply against a basket of currencies after the statement. Yields on U.S. Treasuries dropped across the board, while stock markets rallied. The S&P 500 closed at its highest level since Dec. 31.

In fresh individual forecasts, policymakers projected weaker economic growth and lower inflation this year and lowered their estimate of where the targeted lending rate would be in the long run to 3.30 percent from 3.50 percent – a signal that the economic recovery would remain tepid.

The interest rate outlook was a shift from the four quarter-point hikes expected when the Fed raised rates in December for the first time in nearly a decade. But global market volatility early this year clouded that plan.

The Fed had adopted a cautious approach at its last policy meeting in January, amid a selloff on financial markets, weaker oil prices and falling inflation expectations.

Policymakers also signaled on Wednesday they expected continued improvement in the job market, with the unemployment rate expected to decline to 4.7 percent by the end of the year and fall further in 2017 and 2018.

And they marked down their forecast for inflation this year to 1.2 percent from 1.6 percent, though it’s seen recovering to close to the central bank’s 2 percent medium-term target next year.

Kansas City Fed President Esther George dissented in favor of raising rates at this week’s meeting.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Jonathan Spicer, Jason Lange, Lucia Mutikani and Megan Cassella; Editing by David Chance and Paul Simao)

U.S. payrolls surge, bolster Fed rate hike prospects

WASHINGTON (Reuters) – U.S. employment gains surged in February, the clearest sign yet of labor market strength that could further ease fears the economy was heading into recession and allow the Federal Reserve to gradually raise interest rates this year.

Nonfarm payrolls increased by 242,000 jobs last month and 30,000 more jobs were added in December and January than previously reported, the Labor Department said on Friday. The unemployment rate held at an eight-year low of 4.9 percent even as more people piled into the labor market.

“Despite panic on Wall Street about impending recession, Main Street goes about its business as usual. This report will get the Fed’s attention, and raises the odds of another rate hike before too long,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

The only blemish in the report was a three-cent drop in average hourly earnings, which in part reflected a calendar quirk and the proliferation of low-paying retail and restaurant jobs. The average length of the workweek also fell last month.

The employment report added to data such as consumer and business spending in suggesting the economy had regained momentum after growth slowed to a 1.0 percent annual rate in the fourth quarter.

Growth estimates for the first quarter are around a 2.5 percent rate, but risks are tilted to the downside after a report from the Commerce Department on Friday showed the trade deficit widened 2.2 percent to $45.7 billion in January.

Economists had forecast employment increasing by 190,000 last month and the jobless rate holding steady.

U.S. stocks were trading higher on the data, while prices for U.S. Treasury debt fell. The dollar slipped against a basket of currencies on concerns about wage growth.

Fears of recession in the wake of poor economic reports in December and slowing growth in China sparked a global stock market rout at the start of the year, causing financial market conditions to tighten.

Though financial markets have priced out bets of a rate hike at the Fed’s March 15-16 policy meeting, they now see a roughly 50 percent chance of an increase at the September and November meetings, according to CME FedWatch.

But economists believe the strong job market and improved growth outlook, together with signs that inflation is creeping up, could prompt the U.S. central bank to lift borrowing costs in June.

The Fed raised its key overnight interest rate in December for the first time in nearly a decade.

“The lack of a more marked pickup in wage growth is the only missing element,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. “But as far as the Fed is concerned, it is already seeing a clear acceleration in core price inflation. A June rate hike is coming.”

EYE ON WAGES

Average hourly earnings dipped 0.1 percent in February, the first drop since December 2014, after spiking 0.5 percent in January. That lowered the year-on-year earnings gain to 2.2 percent from 2.5 percent in January.

The average workweek fell to a two-year low of 34.4 hours last month from 34.6 hours in January, but economists cautioned that the series tended to be volatile.

“If labor demand was really about to fall, why was there such a sharp rise in employment?” said Harm Bandholz, chief U.S. economist at UniCredit in New York.

With labor market slack being absorbed, wage growth is expected to accelerate.

A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment fell two-tenths of a percentage point to 9.7 percent, the lowest level since May 2008.

Fed Chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with growth in the working-age population.

Also adding to the strong tone of the jobs report, the labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, increased two-tenths of a percentage point to 62.9 percent, the highest level in just over a year. The employment-to-population ratio hit its highest level since April 2009.

Job gains were almost broad-based in February, though manufacturing and mining employment fell. The services sector created 245,000 jobs after adding 153,000 jobs in January.

Mining shed a further 18,000 jobs after losing 9,000 positions in January. Mining payrolls have declined by 171,000 jobs since peaking in September 2014, with three-fourths of the losses in support activities.

More losses are likely after oilfield services provider Halliburton Co <HAL.N> said last month it would cut a further 5,000 jobs because of a prolonged slump in oil prices.

Manufacturing lost 16,000 jobs, reversing some of January’s surprise increase. Private education jobs rebounded after plunging in January. Construction payrolls increased 19,000 and government added 12,000 jobs.

Retail payrolls increased 54,900, adding to the 62,100 positions created in January. Leisure and hospitality jobs rose 48,000, with employment at restaurants and bars increasing by 40,200.

(Reporting by Lucia Mutikani; Editing by Clive McKeef and Paul Simao)

Fed not likely to reverse course on rates despite risks, Yellen says

WASHINGTON (Reuters) – The Federal Reserve is unlikely to reverse its plan to raise interest rates further this year, but tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth have raised risks to the U.S. economy, Fed Chair Janet Yellen told U.S. lawmakers on Wednesday.

“I don’t expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates,” Yellen said. “There is always a risk of a recession…and global financial developments could produce a slowing in the economy,” she added.

Yellen said she expected continued U.S. economic growth would allow the Fed to pursue its plan of “gradual” rate hikes, but her comments kept the central bank’s options open.

“I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don’t think it is going to be necessary to cut rates.”

Investors have all but ruled out further interest rate rises this year, after the Fed raised its fed funds rate for the first time in a decade in December.

“The general message she intended to deliver is that additional rate hikes remain the base case, but markets have to stabilize before we see more,” said Cornerstone Macro analyst Roberto Perli.

Stock indexes worldwide recovered some ground before ending little changed on Wednesday after Yellen’s comments eased concerns about the likely path of U.S. interest rates.

Worries about Chinese economic growth, poor U.S. fourth quarter corporate earnings, and the impact on capital spending and employment in the energy sector of the slump in oil prices, have roiled global markets in the past month.

The MSCI all-country world equity index ended little changed around 358.08, while the S&P 500 stock index closed steady at 1,851.86.

The U.S. dollar fell to a 15-month low against the yen as investors backed away from earlier expectations that the Federal Reserve would continue to raise interest rates.

“What Yellen said has been taken positively,” said Richard Sichel, chief investment officer of Philadelphia Trust Co in Philadelphia. “Stocks in general are cheaper now than they were three days ago or three months ago, so there’s an opportunity to step in.”

YELLEN ACKNOWLEDGES RISKS, BUT SEES U.S. ECONOMY HEALTHY

Yellen’s comments were her first since the Fed’s December rate hike, allowing her to take stock of several weeks in which concerns have grown about slowing U.S. growth, a continued collapse in oil markets, a downturn in U.S. equities, and more than one suggestion that the Fed’s December move was a mistake.

Some of the most pointed questions from lawmakers on the House Committee on Financial Services, however, focused less on the broad economics of the Fed’s rate hike and more on the tools the central bank has used to achieve it, particularly the payment to banks of interest on the roughly $2.5 trillion in reserves held at the Fed.

While Yellen said the interest payments on bank reserves are currently an indispensable part of the Fed’s arsenal to raise short term interest rates, the program drew bipartisan criticism.

“This is going to the big banks, it is a subsidy…Please explain that,” said California Democrat Maxine Waters, in critical comments that drew agreement from the committee’s chairman, Texas Republican Jeb Hensarling.

As in her other congressional appearances, Yellen also sparred with Republicans over her opposition to using a stated monetary policy rule instead of the Fed’s discretion in setting interest rates, and fielded questions from Democrats about continued high unemployment among blacks and Hispanics.

“Our tools are not ones that can be targeted at particular groups,” Yellen said, suggesting “job training, educational programs, programs that address barriers in the labor market, this is Congress’ job to address.”

The Fed regards the current 4.9 percent jobless rate as close to full employment, and Yellen said that could fall even further if the economy grows as expected.

In her prepared remarks, however, Yellen acknowledged that a series of global problems have grown worse since the Fed lifted rates from near zero in December.

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market,” Yellen said in her semi-annual appearance before lawmakers.

But Yellen emphasized a steady-as-she-goes account of Fed policy, with good reason to believe the United States economy will continue to grow and allow the Fed to pursue its plan of gradual rate hikes.

The Fed “expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen,” she said.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Jason Lange, Ann Saphir, Megan Cassella and Lucia Mutikani; Editing by Andrea Ricci and Clive McKeef)

U.S. inflation survey tumbles in red flag for Fed

NEW YORK (Reuters) – An increasingly important gauge of U.S. inflation tumbled last month to its lowest level since the Federal Reserve Bank of New York began the survey in mid-2013, in what could be taken as another warning bell for the U.S. central bank.

The New York Fed’s survey of consumers found expectations for inflation one and three years in the future fell as Americans were more cognizant of lower gasoline prices and costs of medical care and college.

One-year median expectations have fallen three months running and hit 2.42 percent in January, from 2.54 percent in December. The three-year ahead prediction was 2.45 percent last month, well down from 2.78 percent the previous month.

Respondents on the younger and older ends of the range, and those with lower education and income, drove the decline, said the New York Fed, whose survey has been increasingly cited by economists and central bankers themselves as a read on when inflation will return to a 2-percent target.

The Fed raised rates in December and aims to keep tightening. But a market selloff in January and worries over a global slowdown has some Fed officials worried that inflation, at 1.4 percent now according to their preferred measure, will not rebound as soon as desired.

The internet-based survey taps a rotating panel of 1,200 household heads, and is done by an outside organization.

(Reporting by Jonathan Spicer; Editing by Andrea Ricci)

Lower oil prices squeezing U.S. manufacturing sector

WASHINGTON (Reuters) – New orders for long-lasting U.S. manufactured goods in December recorded their biggest drop in 16 months as lower oil prices and a strong dollar pressured factories, the latest indication that economic growth braked sharply at the end of 2015.

Despite the slowdown in growth, which was acknowledged by the Federal Reserve on Wednesday, the labor market remains on solid ground. First-time filings for jobless benefits retreated from a six-month high last week, other data showed on Thursday.

Economists have expressed worries that the energy sector slump and drag from a strong dollar are spilling over to other parts of the economy, which would lead to continued weakness in early 2016.

“U.S. companies are cutting investment sharply, and the key worry is that it seems to be spreading beyond the oil sector and in the meantime consumers are missing in action, not able to offset the huge drag from the energy sector,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

The Commerce Department said durable goods orders plunged 5.1 percent last month, the biggest drop since August 2014, after slipping 0.5 percent in November. The decline was generally broad-based, with orders for transportation equipment plunging 12.4 percent and bookings for non-defense aircraft plummeting 29.4 percent.

The drop in aircraft orders is surprising as Boeing received orders for 223 aircraft in December, up from 89 planes the prior month, according to information posted on its website.

Economists had forecast durable goods orders falling only 0.6 percent last month. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 4.3 percent in December, the largest drop in 10 months. These so-called core capital goods orders fell 1.1 percent in November. The decline in orders for both durable and capital goods adds to weak data on retail sales, industrial production, exports and business inventories, suggesting the economy slowed sharply in the fourth quarter.

Apart from the buoyant dollar and spending cuts by energy firms bruised by the slump in oil prices, the economy has been blindsided by anemic demand overseas and business efforts to trim an inventory overhang. The growth outlook has been dimmed by the recent stock market selloff.

According to a Reuters survey of economists, the government is expected to report on Friday that fourth-quarter gross domestic product increased at a 0.8 percent annual rate after notching a 2 percent pace in the third quarter. There is, however, a risk that output contracted in the fourth quarter.

The U.S. dollar extended losses against the euro after the data and was down against a basket of currencies. Stocks were largely flat as were prices for U.S. government debt.

DOUR REPORT

The Fed said on Wednesday “economic growth slowed late last year” and noted that business fixed investment has been increasing at a “moderate” pace in recent months.

The U.S. central bank left its benchmark overnight interest rate unchanged and said it was “closely monitoring global economic and financial developments” to assess their impact on the U.S. labor market and inflation.

Economists said the dour durable goods orders report could heighten the Fed’s concerns about the impact of global headwinds and the fallout from the dollar, which has gained 11 percent against the currencies of the United States’ main trading partners since last January.

“While some of this slowdown is likely to be reversed in coming quarters, it will continue to argue for caution at the Fed about whether the economy can handle a further tightening in monetary policy in the near term,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Fed raised rates in December for the first time in nearly a decade.

Weak oil prices have eroded the profits of energy companies, forcing oilfield service firms like Schlumberger and Halliburton to cut capital spending budgets.

Oil prices have dropped more than 60 percent since mid-2014.

Pointing to weak business spending in the fourth quarter, shipments of core capital goods – used to calculate equipment spending in the GDP report – fell for a third straight month in December. Unfilled core capital goods orders declined 1.0 percent, the biggest drop in nearly six years. In a second report, the Labor Department said initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 278,000 during the week ended Jan. 23. The drop almost reversed the prior two weeks’ increases.

It was the 47th straight week that claims remained below the 300,000 mark, which is associated with strong labor market conditions. That is the longest stretch since the early 1970s.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)