WASHINGTON — The Federal Reserve and financial markets are having a difference of opinion.
The Fed expects the domestic economy to keep chugging along. Investors fear a global downturn.
The Fed says it is still thinking about raising its benchmark interest rate again as soon as March. Investors are betting the Fed will not move before 2017.
The split-screen divide was on display Thursday, as the Fed’s chairwoman, Janet L. Yellen, delivered a relatively upbeat assessment to the Senate Banking Committee while investors were dumping stocks and shoveling money into safe havens like government debt and gold. The Dow Jones industrial average finished the day down nearly 255 points, or 1.6 percent.
“A lot has happened” since December, when the Fed predicted it would spend 2016 gradually raising interest rates, Ms. Yellen acknowledged. And risk-averse investors could disrupt slow-and-steady economic growth, she allowed.
But her tone was far from bleak. Asked about the risk of a recession, Ms. Yellen responded that anything is possible but “expansions don’t die of old age.” She made clear that Fed officials were still debating when, not whether, they should raise rates again.
“We will meet in March, and our committee will carefully deliberate about what impact these developments have had,” Ms. Yellen told Congress and the cameras, referring to the market turmoil and next month’s meeting of the Federal Open Market Committee. “Today I think it’s premature to render a judgment.”
But economic jitters are shaping the questions Ms. Yellen is facing, as retirement accounts shrink and investors’ stomachs churn. Pressed by Senator Dean Heller, Republican of Nevada, Ms. Yellen said she did not think the Fed had contributed significantly to the convulsions in financial markets by its December decision to raise its benchmark interest rate for the first time since the financial crisis.
“I don’t think it’s mainly our policy,” she told Mr. Heller.
But some analysts say the Fed is playing a role. They worry that the Fed, and its counterparts around the world, either cannot or will not move to shore up growth. The Standard & Poor’s 500-stock index has lost 10 percent of its value this year, closing Thursday at 1,829.08. The price of the benchmark 10-year Treasury climbed to the highest level since 2012.
“It seems central banks have reached the end of road,” said Markus Schomer, the chief economist at PineBridge Investments in New York. “No support for scared financial markets here.”
The price of fed funds futures, bets on the future level of the Fed’s benchmark rate, now reflect roughly a 10 percent chance the Fed will raise rates this year. That means investors don’t expect the Fed to make things worse. But they see little prospect that the Fed will expand its efforts.
Indeed, Ms. Yellen told Congress on Thursday that the Fed did not intend to cut rates back to zero.
She also continued to play down the possibility that the Fed would seek to provide an additional jolt of stimulus by imposing negative interest rates — basically reversing the normal order of things so that lenders pay a fee for lending while borrowers collect a fee for borrowing.
A growing number of central banks, including the European Central Bank and the Bank of Japan, have turned to negative rates to supplement standard measures. Sweden’s central bank said Thursday it would push its benchmark rate even further below zero, to negative 0.5 percent.
Ms. Yellen surprised some members of the House Financial Services Committee on Wednesday when she testified that the Fed had not considered the idea in detail. On Thursday she was slightly less dismissive, telling senators the Fed was reviewing the issue, but emphasizing again that she did not foresee a need for negative rates in the United States.
“I wouldn’t take those off the table, but we would have work to do to judge whether they would be workable here,” she said.
There are reasons for economic optimism. Ms. Yellen pointed to the strength of consumer spending and said she still expected lower oil prices to stimulate growth. The magnitude of the decline in prices took the Fed by surprise, and the costs have been larger than expected, but Ms. Yellen said the Fed still expected the average household to reap a benefit of about $1,000.
Ms. Yellen also played down some reasons for pessimism. She has previously pointed to stronger wage growth as an important sign that the economy is improving, and on Thursday she said that she was not overly impressed by signs of acceleration in the recent data. “At best the evidence of a pickup is tentative,” she said.
But in an exchange with Senator Chuck Schumer, Democrat of New York, Ms. Yellen also appeared to back away from her previous emphasis on that indicator.
“I would not say that wage growth is a litmus test for changes in monetary policy,” Ms. Yellen said.
Republicans and Democrats sparred with Ms. Yellen over the Fed’s ability to improve economic conditions, but the tone of the hearing was significantly less confrontational than her appearance Wednesday before the House committee.
Senator Bob Corker, Republican of Tennessee, emphasized that a crucial reason for the slow pace of economic growth in recent years was the relatively slow growth of productivity, or the economic output of the average worker.
“Does monetary policy affect workers’ knowledge or skills?” he asked Ms. Yellen.
As she began to answer, he interjected, “The answer is no.”
“It’s a ridiculous notion, is it not?” he continued. “That’s our job.”
He meant that Congress could improve productivity by effective investment in areas like education or by changing the tax code to encourage innovation.
Ms. Yellen said she generally agreed, but she noted that the Fed did have a role to play by encouraging economic growth. Companies curtail investments during downturns, and workers without jobs begin to lose their skills.
Asked by Senator Robert Menendez, Democrat of New Jersey, what more the Fed could do to reduce long-term unemployment, she emphasized the point.
“What we are trying to do to contribute to the solution of that problem is to keep the economy growing at a steady pace, to keep the labor market improving, in the hope and expectation that a stronger labor market will improve the status of all groups,” she said.
Yet Ms. Yellen disappointed Democrats too by suggesting that in her view the Fed was doing enough. She reiterated the Fed’s position that it was necessary to raise interest rates to maintain control of inflation as job growth continued.
“I see it just the other way,” Mr. Schumer said. “I am less worried about inflation and more worried about slow wage growth.”
By BINYAMIN APPELBAUM. FEB. 11, 2016.
The New Times.