Yellen Points To Gradual Improvements In the U.S. Economy While Citing Downside Risks

U.S. stocks opened slightly higher to flat on Wednesday as global investors remain cautious ahead of Thursday’s Brexit referendum vote  that could lead to the U.K. leaving the 28 member European Union.

Yesterday Fed Chair Janet Yellen gave a prepared speech before Congressional members of the Senate Banking Committee on Capitol Hill that reiterated many of the same themes she addressed one week earlier during the closing of the Fed’s 2 day June meeting that saw Fed members voting against raising interest rates in June.

Yellen pointed out that Fed’s monetary policy is “not on a preset course” and acknowledged that job growth over the past 2 months declined since the 1st quarter of 2016 when job growth averaged 200,000 per month.

“In April and May, however, the average pace of job gains slowed to only 80,000 per month or about 100,000 per month after adjustment for the effects of a strike. The unemployment rate fell to 4.7 percent in May, but that decline mainly occurred because fewer people reported that they were actively seeking work” Yellen said.

Yellen emphasized it is important not to overreact to one or two jobs reports and said that several other timely indicators of labor market conditions still look favorable.

Yellen explained that the “available indicators point to a noticeable step-up” in U.S. GDP growth during the second quarter and admitted that foreign growth and the appreciation of the dollar weighed on exports in the first quarter of 2016, while the energy sector was hard hit by the steep drop in oil.

After citing the pick up in consumer spending that was supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth, Yellen remarked “housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.”

Yellen said monetary policy remains accommodative and noted the pickup in household spending, together with underlying conditions that are favorable for growth, lead her to be optimistic that further improvements are ahead in the labor market and the economy over the next few years.

When addressing core inflation, Yellen said that it was near 1 and 1/2 percent and indicated that as the transitory influences holding down inflation fade and the labor market strengthens further, Committee members at the Fed expect inflation to rise to 2 percent over the medium term.

Yellen said “considerable uncertainty about the economic outlook remains” and acknowledged the latest reading on the labor market and the weak pace of investment illustrate one downside risk, namely that domestic demand might falter.

Global Exposure

Yellen stated that China continues to face challenges as the country shifts to a more consumer driven economy.

“Although concerns about slowing growth in China and falling commodity prices appear to have eased from earlier this year, China continues to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth” Yellen said.

Yellen also admitted that a U.K. vote to exit the European Union could have significant economic repercussions and noted that Committee members are closely monitoring global economic and financial developments.

Written By:

Johnathan Schweitzer

schweitz31@gmail.com

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