WASHINGTON -- The U.S. economy faces a number of uncertainties that require the Federal Reserve to proceed cautiously in raising interest rates, Fed Chairman Janet Yellen said Tuesday.
In delivering the Fed's twice-a-year economic report to the Senate Banking Committee, Yellen cited a slowdown in job growth in April and May and said the Fed will be watching carefully to see whether the weaker momentum is temporary or a sign of a bigger problem.
Yellen said that despite her optimism about the economy's long-term prospects, "we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future."
Yellen expressed concerns about the global economy, including slower growth in China and Thursday's vote in Britain over whether to leave the European Union. She also noted weak productivity growth in the U.S. and persistently low inflation. She is scheduled to appear today before the House Financial Services Committee.
Yellen emphasized the same cautious approach the central bank took after its meeting last week, when it left a key interest rate unchanged. The Fed raised its benchmark rate by a quarter-point in December to a range of 0.25 percent to 0.5 percent and at the time projected four rate increases this year.
Financial market turbulence, a global economic slowdown and a sharp drop in oil prices have kept the Fed on the sidelines since December. Fed officials are now projecting two rate changes this year. At last week's meeting, the number of officials who forecast one rate increase this year climbed to six from just one in March.
In testimony Tuesday, Yellen acknowledged problems weighing on the economy.
"Economic growth has been uneven over recent quarters," she said. "Subdued foreign growth and the appreciation of the dollar weighed on exports while the energy sector was hit hard by the steep drop in oil prices since mid-2014. In addition, business investment outside of the energy sector was surprisingly weak."
During the question-and-answer session, Yellen was asked about the likelihood that the country could be in a recession by the end of the year.
She said she expects the U.S. economy to grow and described the possibility of a recession this year as "quite low."
Yellen was pressed by Democrats on the committee to make sure that the Fed did not raise rates so fast that it could derail a fragile recovery. Meanwhile, some Republicans questioned whether the Fed's decision to keep rates near zero for seven years might be hurting growth.
Senate Banking Committee Chairman Richard Shelby, R-Ala., questioned whether keeping rates low could run the risk of dangerous asset bubbles and financial market instability at some time in the future.
Yellen said she did not believe there are any threats to financial stability at the moment. While the growth in credit had picked up, she does not see it at "worrisome levels," she said.
While overall growth, as measured by the gross domestic product, slowed to a tepid rate of 0.8 percent in the first quarter, Yellen in her testimony pointed to encouraging signs that growth was strengthening in the second quarter.
But even with a rebound in growth and job creation, Yellen noted other problems. While the overall employment rate has fallen to 4.7 percent from a high of 10 percent, Yellen said it was "troubling" that the rate for blacks and Hispanics remained above the national average. She said the median income for black households was "well below" the median for all households.
She said that "vulnerabilities in the global economy" included China's challenges as it transitions from reliance on export-led growth to domestic consumption. She said that the vote Thursday in Britain over leaving the European Union "could have significant economic repercussions."
Yellen's recent comments and those of other Fed officials indicate that they are being forced to rethink the path for rate increases in the face of persistently slow economic growth and inflation that has remained below the Fed's 2 percent target for the past four years.
Some private economists believe the central bank might raise rates at its next meeting, on July 26-27, if markets are not roiled by Britain's EU vote and the U.S.' June employment report bounces back after weak May numbers. But other analysts think the first rate increase this year is more likely to happen in September, followed by another in December.
Information for this article was contributed by Martin Crutsinger of The Associated Press, Nelson D. Schwartz of The New York Times and Christopher Condon of Bloomberg News.
A Section on 06/22/2016