Did Janet Yellen raise the fed funds rate in December only to turn around and lower it now?
With the selloff in the equity market, sharp decline in the price of crude oil and uncertainty surrounding the U.S. and global economies, the LAST thing we need is for a crisis of confidence to develop concerning the competence of the Federal Reserve!
Part of the text of Janet Yellen's testimony to Congress that she will give today, just released, makes one wonder what the Fed saw in December 2015 sparking an increase in the fed funds rate that the rest of us didn't see!
At the end of January 2016 I wrote the following...
'The Federal Reserve, after raising its benchmark fed funds rate .25% in December 2015, yesterday left rates unchanged!
The December increase was implemented despite inflation remaining well below the Fed's target rate of 2% and in the face of an economic recovery that could be, at best, termed tepid.
At the time some speculated that the Fed needed to raise rates so that they would have the ability to lower them again should the economy weaken. Still others thought that to retain any credibility they needed to make a move.
Of particular note from the text of today's testimony is the following...
'...Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates 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. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee 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.
As is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further...' (Source)
Hopefully the questioning by Congress will help to shed more light on the Federal Reserves thought process from the past and potential decision-making going forward.
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