Yellen: Too early to determine impact of global developments

At that time, she hailed the Fed’s decision to lift short-term interest rates by a quarter of a percentage point as a sign of the progress that the U.S. economy had made since the 2008 financial crisis.

“These factors may well influence the balance of risks or the trajectory of the economy and thereby might affect the appropriate stance of policy”, Ms Yellen said. USA stock indexes all dropped more than one percent when they opened, while major European and Asian exchanges were off more than two percent overnight and into Thursday.

“By the end of her testimony, sentiment completely shifted”, said Kathy Lien, managing director of BK Asset Management in NY.

Yellen said the “tightening financial conditions and uncertainty over China’s economic health are both risks to the United States recovery, however, it is unlikely that the Fed would reverse the interest rate tightening cycle it began in December”.

At her first appearance yesterday, Yellen noted that the Fed is closely watching developments in financial markets for possible downside risks to the economy.

Shepherdson said her ambiguity left room for the FOMC to wait for more economic data on the USA and global economies over the next month to choose its path.

After initialling turning positive against the yen following the release of Yellen’s remarks, the dollar reversed course, falling more than 1 percent and touching a session low of 113.74 against the yen. That could hurt commodities exporters and eventually crimp demand overseas for goods produced in the U.S.

Low oil prices have caused inflation in the U.S.to run well below the Fed’s 2 percent annual target. In currency markets, the dollar took a dive as investors adjusted their expectations for fewer interest rate increases in the U.S. It fell to 112.26 yen from 113.35 yen.

“I am not aware of any legal restriction that would mean that we could not establish negative rates, but I will say that we have not looked carefully at the legal side of this”, she said Thursday. She sought to calm concerns, however, by saying that “recent economic indicators do not suggest a sharp slowdown in Chinese growth”.

Still, the futures market is indicating that if the Fed doesn’t move to outright NIRP, the chances for an aggressive rate-hiking policy ahead, as indicated after the December rate rise, are nil. Investors, nervous about the global economy, have sent prices tumbling in equity markets – the market was down sharply again Thursday – and pulled back from lending money to riskier borrowers. She expected the wage gains to accelerate as unemployment figures fell to an eight-year low. Financials stocks were among the biggest decliners as investors anxious that interest rates in the US and elsewhere would remain low.

In Europe, France’s CAC 40 slid 4 percent to 3,899.73, dragged down by a 13 percent drop in the shares of bank Societe Generale, which warned about its profits.