As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said Wednesday the central bank has not completely researched whether that would be legal.
During her semiannual congressional testimony, Yellen said the Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed but never fully researched the issue.
"We didn't fully look at the legal issues around that," she said. "I would say that remains a question that we still would need to investigate more thoroughly."
Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.
"There would seem to be increased fears of recession risks that is resulting in rising in risk premia. We've not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching," she told the House Financial Services Committee.
Her testimony comes as speculation grows that the Fed might consider implementing negative rates on what it pays on excess reserves. That would be one option the Fed would have should the current bout of economic softness intensify.
"I do not expect the FOMC is going to be soon in the situation where it's necessary to cut rates," she said. "Let's not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. ... We want to be careful not to jump to a premature conclusion about what's in store for the U.S. economy."
In the 2010 examination of whether to use negative rates, Yellen said that outside of the legal questions, there was doubt raised over whether it was the right way to go.
"We got only to the point of thinking it wasn't a preferred tool," she said. "We were concerned about the impact it would have on money markets, we were worried it wouldn't work in our institutional environment."
During the question and answer session, she added that the Fed wouldn't be bound by set benchmarks or guidelines such as the Taylor rule that prescribes rates depending on economic milestones.
"The benefit of a rule-based system is it's systematic and understandable," Yellen said. However, she said her fellow Fed officials believe the rules constitute only a "useful benchmark" but that "we need to take into account a large set of indicators of how the economy is performing."
The Fed hiked its rate target a quarter-point in December after keeping the funds level near zero since late-2008. Zero interest rate policy coincided with a monthly bond-buying program known as quantitative easing, three rounds of each exploded the Fed's balance sheet to $4.5 trillion.
Tightening financial conditions driven by falling stock prices, uncertainty over China and a global reassessment of credit risk could throw the U.S. economy off track from an otherwise solid course, Yellen said earlier in prepared testimony to Congress.