US Central Bank to Proceed with Caution on Higher Interest Rates

The head of the US central bank warned that "considerable uncertainty" remains in the economic outlook and said the Federal Reserve will proceed cautiously with plans to raise interest rates.

    Federal Reserve Chairwoman Janet Yellen pointed to risks posed by the global economy, including slower growth in China and the potential of a British exit from the European Union following a referendum this Thursday.

    In the US economy, she noted inflation remaining below the Fed's target and an improving but slowing job market "suggesting that our cautious approach to adjusting monetary policy remains appropriate".

    The Federal Reserve "continues to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate," she told the Senate banking committee in a hearing at the US Capitol in Washington.

    The Fed last week left its benchmark interest rate unchanged amid the slowing of the job market after the rate was hiked from an unprecedented near-zero range for the first time in seven years in December.

    Most members of the Federal Reserve board expect the benchmark interest rate to remain below 1% by the end of the year and below 2% by the end of next year.

    However the pace of interest rate increases would depend upon current economic conditions and could be increased more quickly if growth or inflation increases more quickly. The latest US Labour Department report showed US payroll expansion screeched nearly to a halt in May, after a sharp slowdown in April. 

    The Fed calibrates monetary policy toward the dual goals of maximum employment and price stability. Yellen said Tuesday that the Fed is closely watching the labour market and believes the slow job growth in recent months may be temporary. 

    She noted slow economic growth in the first quarter, but pointed to signs that gross domestic product would pick up in the second quarter amid a growth in consumer spending. She said she was "optimistic that we will see further improvements in the labour market and the economy more broadly over the next few years".