Global shares are under heavy selling pressure, Crude oil prices are dropping, and investors are fleeing to safe assets such as gold, the Japanese yen, and Treasuries following Fed Chair Janet Yellen’s comments before Congress yesterday that acknowledged global headwinds to the economy but fell short of offering a new accommodative shift in monetary policy in 2016.
Gold has reached a one year high, the U.S. dollar has dropped to the lowest level since 2014 against the yen, and the yield on the 10 Year Treasury has tumbled to 1.535 percent as investors turn to safety and flee riskier assets such as equities.
European shares are plummeting. France’s CAC 40 is down 3.06 percent, the English FTSE is 1.84 percent lower, and Germany’s DAX is 2.05 percent lower.
Yesterday Fed Chair Janet Yellen spoke in Washington D.C. before the Committee on Financial Services, U.S. House of Representatives in a policy report.
During the address, Yellen admitted that financial conditions in the United States have recently become less supportive of growth and acknowledged the drop in equity prices, higher borrowing costs 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, although declines in longer-term interest rates and oil prices provide some offset” Yellen said.
Admitting that the economic outlook is uncertain and citing China’s recent decision to devalue the yuan in January, Yellen said foreign economic developments pose some risk to the U.S. economy and contributed to the recent fall in the prices of oil and other commodities alongside weaker global growth.
Yellen said that “low commodity prices could trigger financial stresses in commodity-exporting economies” and pointed to vulnerable ones in emerging economies and commodity producing firms in many countries.
Yellen explained that given the recent further declines in the prices of oil and other commodities and appreciation of the dollar, Committee members at the Fed expects inflation to remain low in the near term but pointed out that “once oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wane, and as the labor market strengthens further, inflation is expected to rise gradually to 2 percent over the medium term.”
Committee members at the Fed still believe that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”
While noting that monetary policy is not on a preset course, Yellen said that the Fed will take its cues from the evolving economic data.
“The actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation” Yellen said.
Yellen will conclude her 2 day meeting today and speak before a Senate Committee at 10:00 a.m. EST.