Yellen flags up ‘considerable’ uncertainty over US fiscal policy

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The US economy and fiscal policy face an uncertain path under the administration of Donald Trump, Janet Yellen warned on Tuesday as she played down any expectations of a March rate rise and reiterated that “monetary policy is not on a preset course”.

Testifying before Congress on Tuesday, the Federal Reserve chair painted a picture of an economy with accelerating growth, higher inflation and a robust labour market that has generated some 16m jobs since its post-crisis trough in early 2010.

That improving economic picture, she said, justified December’s move by the Fed to raise interest rates for only the second time in the past decade and expectations that it would have to continue to increase its target rate gradually in the months to come.

But in prepared remarks for her Valentine’s Day testimony, Ms Yellen also struck a note of caution about the new administration and expectations that its plans for tax cuts and infrastructure spending would lead to more rapid economic growth.

“Considerable uncertainty attends the economic outlook,” she said, pointing to “possible changes in US fiscal and other policies” as one of the main sources of that uncertainty alongside questions about productivity growth and international developments.

The Fed’s policymakers reiterated earlier this month that they expected “the evolution of the economy to warrant further gradual increases in the federal funds rate”, Ms Yellen pointed out.

However, any future moves, Ms Yellen said, would depend on continuing progress in both US employment and inflation, which at 1.6 per cent remains below the Fed’s 2 per cent target rate.

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