Yellen: Stock market woes weighing on economy

Cameron Lancaster

Recent stock market turmoil is weighing on the economy, but it is too soon to say how large of an impact there will be, according to Federal Reserve Chairwoman Janet Yellen.

In prepared testimony before Congress, Yellen acknowledged the stock market slide that has been underway since the beginning of the year. With the Fed eyeing a series of rate increases to move the nation’s monetary policy back to a more normal level, Yellen said the central bank will be watching closely to see if that market drama spills into the broader economy.

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“Financial conditions in the United States have recently become less supportive of growth,” she sad. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.”

At the same time, Yellen insisted that the labor market has continued to improve — the jobless rate fell below 5 percent in May for the first time in eight years — and the economy is still poised for moderate growth. As such, she did not suggest that the Fed was completely revisiting its monetary policy strategy, just monitoring matters closely.

“As is always the case, the economic outlook is uncertain,” she said.

Yellen’s testimony before the House Financial Services Committee Wednesday marks her first since the Fed raised interest rates in December. That marked the first rate hike in nearly a decade and the first step toward the Fed trying to renormalize monetary policy after the financial crisis and resulting recession.

But Yellen took steps to emphasize that while the Fed is looking to raise rates going forward, it will not be in a rush to do so and is not looking to slam the brakes on the economy.

“The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” she said. “In addition, the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run.”

Her appearance before lawmakers also comes at a politically precarious time for the central bank. There have been growing calls, particularly among Republicans, to overhaul how the Fed conducts monetary policy. House Republicans have pushed legislation, which the Fed opposes, that would require the central bank to adhere to an explicit set of guidelines in setting policy.

Republicans argue that the Fed’s post-crisis policies missed the mark and that years of extremely low rates and several rounds of unprecedented stimulus, known as quantitative easing, did not help the economy but instead increased the likelihood of damaging inflation in the future.

“When is monetary policy going to be more predictable, more method based, and less improvisational,” said Financial Services Chairman Jeb Hensarling (R-Texas) in a CNBC interview. “We need to understand what is the direction of monetary policy going forward.”