Prospects dim for rate rise as Yellen adopts cautious line

The prospect of an early US interestrate increase diminished further yesterday as Janet Yellen advocated caution given unfavourable market conditions, weaker than expected overseas growth and an uncertain inflation outlook.

The Federal Reserve chair said recent declines in market expectations for interestrate rises had helped cushion the US economy from adverse developments overseas, describing the moves as an “automatic stabiliser”.

But she stressed that the Fed had little scope to reverse course and stimulate the economy with rate cuts if the US unexpectedly hit the buffers, underlying the need for a gradual tightening of policy.

She homed in on risks still stewing in China and the oil markets as she argued in a New York address for the central bank to move carefully as it considers when to lift rates again.

Treasuries rallied as Ms Yellen spoke, with traders at CRT Capital calling her remarks a “surprisingly dovish take on the current policy stance and nearterm outlook”. The twoyear

Treasury yield, which moves inversely to its price, slipped 6 basis points to 0.81 per cent.

“Whatever speculation there was on [an April rise] conveyed by previous Fed speakers, that has been blown out of the water,” said Steven Englander, head of rates strategy at Citigroup.

US stocks bounced off lows earlier in the trading day, pushing the benchmark S&P 500 index back into positive territory for the year, while the dollar slid to its lowest levels in a week.

The Fed in December lifted rates for the first time in nearly a decade but the US outlook has since been clouded by a series of setbacks overseas, as oil prices and equity values

gyrate, the dollar hangs at elevated levels and concerns dog global growth. In their March meeting, Fed policymakers halved their median forecast for the number of quarterpoint interest rate increases projected for this year to two.

In recent days a series of Fed speakers, including John Williams of the San Francisco Fed and Dennis Lockhart of the Atlanta Fed, have signalled that a second rate rise could

nevertheless remain on the table for as soon as April given steady domestic US data and certainly that one is possible in June.

But Ms Yellen struck a cautious tone in an address that did not suggest she wanted to prime markets for an imminent move. She said it was too soon to say if a recent pickup in core

inflation would prove durable. And she dwelt on subdued inflation expectations, saying that while there were reasons not to put too much weight on recent low readings, some indicators “do concern me”.

The Fed chair said her basic expectation was for “stable” inflation but “the decline in some indicators has heightened the risk that this judgment could be wrong”. If so, inflation could

take longer to return to the Fed’s 2 per cent target, requiring the central bank to keep policy looser for longer than expected.

Sam Fleming Washington