The Federal Reserve should proceed with caution in adjusting policy, Chair Janet Yellen said Tuesday, acknowledging that economic and financial conditions are in some respects less favorable now than in December.
Yellen, speaking to the Economic Club of New York, noted in prepared remarks that recent readings on the strength of the U.S. economy since the beginning of the year have been mixed. All major U.S. indexes turned positive and Treasury yields hit multi-week lows after the release of Yellen's remarks.
On the policy front, Yellen said research suggests that, with a funds rate at zero and increased uncertainty, the best policy is greater gradualism. Still, the Fed can hike if the economy grows faster, she said. But if the economy falters, she added, the Fed can "provide only a modest degree of additional stimulus."
In fact, Yellen said that only gradual increases in the federal funds rate are likely to be warranted in coming years, and global developments have increased the risks associated with the Fed's economic outlook.
On inflation, Yellen sounded a cautious note, saying it is "too early to tell" if the recent faster pace of core PCE inflation (excluding volatile food and energy components) will prove durable. In fact, she said she continues to expect overall PCE inflation for 2016 to come in "well below" the Fed's 2 percent objective. Yellen added that continued low readings for some expected inflation indicators "concern" her.
"The inflation outlook has also become somewhat more uncertain since the turn of the year, in part for reasons related to risks to the outlook for economic growth," she said. "To the extent that recent financial market turbulence signals an increased chance of a further slowing of growth abroad, oil prices could resume falling, and the dollar could start rising again."
Responding to a question after her remarks, Yellen said the "major thing that's changed" between December and March affecting the Fed's baseline outlook is "a slightly weaker projected pace of global growth."
The Fed chair had said in her speech that "foreign economic growth now seems likely to be weaker this year than previously expected," but the "overall fallout" of global market developments for the U.S. will most likely be "limited."