Yellen: Fed should "proceed with caution" with an increase in rates

Janet YellenImage copyrightGetty Images
The US Federal Reserve chair Yellen system said that the Fed should "proceed with caution" before raising interest rates.

She said that global risks were not to have a profound impact on the US, but caution is still needed.

Global changes and risks have led politicians to draft a slower path of rate increases than initially expected in December, said Ms. Yellen.

US markets rose during his speech at the Economic Club of New York.

Her tone was similar to the Fed's statement in mid-March, when the central bank has not made any bid changes and guided the expectations with respect to the slower increase after the increase in December.

Ms. Yellen repeated his message from previous pubic speech that volatile oil prices and a slowdown in China, along with the way in the near future inflation will reach 2% target by the Federal Reserve, are the key factors governing the Fed to adopt a gradual approach to higher rates.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, said that her caution was not surprising, but stood in contrast to the support for rate increases from other Fed speakers in recent days.

He added: "Ultimately, the comments [Yellen to] sound is not consistent with the looming hike rates in April and leave considerable doubt about whether the increase rates in June.

Earlier Tuesday, the head of the San Francisco Fed, John Williams, said that the US economy is doing "quite well."

As it has done in previous speeches, Ms. Yellen believes that the market should be open to the possibility of the news, which increases confidence.

"We must not ignore the greeting probability that economic conditions may be more favorable than we now expect," she said.

Audiences in New York laughed when Ms. Yellen was asked how long the Fed is expected to take to reach "normal" interest rate and whether she felt the market was not able to understand the bank's plan.

The Fed is trying to reassure markets of its "gradual" plan since the entry into force in December.

After the speech, Ms. Yellen, in a Wall Street rose sharply. S & P 500 rose 0.8% and the Nasdaq jumped 1.5%, while the index Dow Jones Industrial Average added only 0.1%.

Unconventional Instruments

Although the focus of his speech was on the interest rate, Ms. Yellen also consider other tools the Fed has at its disposal, if the US economy were to suffer a decline.

These innovative tools - including asset purchases, forward direction and negative interest rates, which have been used in Europe - have been criticized for helping the banks, not to stimulate the economy.

Ms. Yellen defended the use of these tools, saying they have helped prevent the recession to become worse.

"They were an effective policy, they have made a difference, and inflation could be lower and unemployment is higher - from the significant amounts - if we did not use this policy," she said.