Yellen Dismisses Interest Rate Lowering

During an annual account presented to the United States Senate, Federal Reserve Chairwoman Janet Yellen reaffirmed the central bank’s commitment to normalizing interest rates after a long period of quantitative easing and artificially low rates. Ms. Yellen also stated that she did not believe that the December rate hike had been responsible for recent securities market volatility.

During her report to the Senate Banking Committee, Yellen did suggest that the Federal Reserve might wait to perform another rate hike. The board is next set to take up the matter of increasing interest rates in March, when analysts originally expected another incremental hike to push rates slightly closer to normal levels. With the current volatility of the stock market and a general lack of investor confidence, maintaining interest rates at their current level may help to continue to stimulate capital investment. Asked whether she believed that the increase in interest rates was responsible for increasing market uncertainty, Yellen also stated that she did not believe that Federal Reserve actions were the primary cause.

Ms. Yellen also largely dismissed the possibility of returning rates to zero or instituting negative interest rates, as many other central banks around the world have recently done. While she said that the board would consider the possibility, she indicated that there would likely be no move to lower interest rates below their current level. Artificially low-interest rates, particularly those which have been pushed into negative rates, have drawn criticism from many global financial experts. While they may help to stimulate spending and investing, they are generally perceived as unsustainable. Some independent analytical groups have even suggested that the long-term application of negative interest rates could be responsible for major financial upsets in the future. Despite these warnings, central banks such as the European Central Bank and the Bank of Japan have recently set their rates below zero.

Yellen’s testimony was, on the whole, positive in nature, with an optimistic outlook for the coming year. While the question of once again lowering interest rates was heavily discussed, the reserve chairwoman indicated that neither she nor the other members of the Fed’s board of governors intends to deviate from the course of gradual rate increases that has already been set out. Monetary policy in terms of its relation to economic productivity, wages and employment rates was was also discussed as a key part of the annual report. Yellen, however, consistently reminded the Senate committee that monetary policy was only loosely related to these economic indicators.