Yellen Says Fed Should Proceed Cautiously In Adjusting Policy

Federal Reserve Chairman Janet Yellen said the central bank of the world's largest economy should exercise caution in proceeding with the monetary policy.

"In particular, developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December," Yellen said while speaking at the Economic Club of New York.

"Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric," Yellen noted.

"If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero."

In addition, Yellen anticipates that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited.

Economists Respond

Following the speech, Benzinga spoke with a few economists.

RSM US Chief Economist Joe Brusuelas said, "Yellen's speech was decisively dovish and reinforced the recent FOMC statement."

"If investors did not understand the 'lower for longer' mantra the Yellen Fed has been selling they do now. One gets the sense that the Fed may be targeting the natural rate of interest which in my estimation has declined from 2.2 to 1.3 which implies the process of policy normalization will evolve over a period of years and will not be complete until well into the next business cycle," Brusuelas said in an email to Benzinga.

Meanwhile, Mohamed El-Erian, chief economic adviser at Allianz, also echoed Brusuelas views on Yellen's latest speech.

"Markets will likely interpret her remarks as relatively dovish, especially given the emphasis both on the adverse external environment facing the US economy due to economic weakness abroad, and on the asymmetrical risks facing Fed policy in such a fluid world," El-Erian stated.

Addressing Yellen's "sovereign debt boots economic activity" rhetoric, within the context that some have said Yellen may be ignoring the debt-driven correction, El-Erian commented, "The basic issue facing the US and most other systemically-important economies in the world is the political failure to undertake the handoff from prolonged dependence on financial engineering to revamped genuine engines of inclusive economic growth."

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