Uncertain economy may prompt Fed to delay rate hike, Janet Yellen suggests

Federal Reserve chair points to considerable uncertainty in speech following weak jobs report on Friday, amid concerns over Brexit and Chinese economy

Hikes to US interest rates might be on hold again thanks to considerable uncertainty about the economic outlook Janet Yellen suggested in a speech on Monday.

Speaking at the World Affairs Council of Philadelphia, days after a surprisingly poor report on the state of the US job market, the Federal Reserve chair said gradual increases to the interest rates were likely to be appropriate. But she omitted the phrase in the coming months a phrase that, when spoken by Yellen 10 days ago, many economists took to imply that the Fed was ready to raise rates soon.

Among the factors that might persuade the Fed against raising interest rates next week are slowing job creation and US economic growth as well as uncertainty about the UK’s potential exit from the European Union (Brexit) and a slowdown in China’s economy.

federal reserve interest rate chart

Even though the financial stresses that had emanated from abroad at the start of this year have eased, global risks require continued attention, said Yellen. China still faces considerable challenges and investors’ perception of risk can change abruptly, she said. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions, she said.

Yellen did not elaborate as to what those repercussions could be.

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Yellen’s speech came three days after the US Department of Labor announced that the US economy had added just 38,000 jobs in May, 122,000 fewer than expected. The disappointing numbers have been attributed to the fact that 40,000 Verizon workers had been on strike for 44 days. The strike ended 10 days ago.

The economy added 2.7m jobs last year, an average of about 230,000 a month, Yellen pointed out Monday. She also noted that wages had gone up, job openings were up, the US economy was fairly close to full employment and that people were quitting their jobs, signalling that they were receiving other offers.

This past Friday’s labor market report was disappointing, said Yellen, adding: “Let me emphasize that one should never attach too much significance to any single monthly report.”

Last time Verizon workers went on strike, in August 2011, the US economy reported that zero jobs were added. The following month, that number was revised to 57,000 jobs, and the month after to 104,000 jobs. The Feds policy-setting committee meets next week, on 14-15 June. There will be no revisions to the jobs report prior to that.

The Federal Reserve increased interest rates for the the first time in nearly a decade last December and two more rate hikes have been expected this year.

The next Fed meeting will take place in July, weeks after the June report and the Brexit vote.

In short, nothing too surprising after Friday’s employment report left little doubt that there would be no tightening at the June 14-15 FOMC meeting, said Jim OSullivan, chief US economist for High Frequency Economics. The speech is consistent with tightening again before too long, but there is no specificity at all on timing.

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