Janet Yellen feels good about America’s economy but sees risks rising overseas.
Yellen, the Federal Reserve Chair, spoke optimistically on Tuesday about the U.S. economy, particularly the strong gains in the job market and resilient consumer spending. But when she turned to the global economy, it got gloomy.
“Global developments pose ongoing risks,” Yellen said at the Economic Club of New York.
Top of her worry list: China and oil. Yellen said uncertainty over China’s economic slowdown and the direction of its currency, the yuan, contributed to the market meltdown at the beginning of the year when the Dow lost about 2,000 points.
And Yellen worries that another downturn in oil prices could lead to spending cuts by oil-driven countries and job losses at energy firms. Such responses “could have adverse spillover effects to the rest of the global economy” Yellen said.
It was Yellen’s first comments since she spoke after the Fed cut its forecast for economic growth just two weeks ago. The Fed’s cooled down expectations stemmed from concerns about the weak global economy hurting the United States.
At its March meeting, the Fed also lowered its projections for rate hikes this year to four from its previous estimate of two rate hikes. The Fed increased rates in December for the first time in nearly a decade.
But immediately following the meeting, some Fed officials were already feeling more bullish about raising rates. St. Louis Fed President James Bullard said last week that the Fed “could probably make a case for moving in April” if jobs and inflation stay on track.
In February, inflation dipped a bit compared to January, the Commerce Department reported Monday. That decline is mostly related to the fall in oil and gas prices in early February.
However, when you take out volatile categories like food and energy, core inflation rose 1.7% in February, matching the gain from January. And since early February, oil prices have rallied, suggesting that inflation could pick up in March.
Monday’s inflation news doesn’t help or hurt the case for a rate hike in April, which is still considered unlikely. However, the odds of an April rate increase could change on Friday when the Labor Department announces the March jobs report.
If the U.S. shows healthy signs of job and wage growth, that could convince the Fed to increase rates at its meeting as soon as April.
