Strong dollar makes Fed cautious

The stronger dollar and the divergence in monetary policies by major central banks has made the Federal Reserve "cautious" on raising interest rates, Fed Chair Janet Yellen said Thursday.

Hours after the European Central Bank announced a rate cut and further policy easing, Yellen acknowledged that the Fed's opposite track has sent the dollar higher, hitting US exports.

"When we have divergent monetary policies globally, it often means that there will be exchange rate movements that accompany that. We have seen that over the last year and a half," Yellen told a congressional hearing.

"The combination of the weak growth abroad, plus the movement in the dollar, has been a factor that has been depressing net exports. And that's been a subtraction from growth."

Noting that the trend is likely to continue, Yellen added, "that makes us much more cautious in terms of raising rates."

But she also argued that US economic strength is rooted in domestic consumption and investment, which continues to grow.

"For very good fundamental reasons, there's greater strength there. So when we put it all together, we're still seeing an overall picture of above-trend growth," she said.

Despite the European Central Bank's interest rate cut earlier Thursday, the dollar actually strengthened by a sharp 2.5 percent against the euro, because, as Yellen noted, markets had expected stronger action by the ECB to stimulate eurozone growth.

The Fed meanwhile is widely expected to begin raising rates after nine years in its December 15-16 policy meeting.
Source: AFP