Fed's Yellen says global risks could pose U.S. growth threat

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Fed's Yellen: Persistent Strains Could Weigh on Outlook

Tightening financial conditions driven by falling stock prices, uncertainty over China and a global reassessment of credit risk could throw the U.S. economy off track from an otherwise solid course, Federal Reserve Chair Janet Yellen said on Wednesday in prepared testimony to Congress.

In remarks that combined a steady-as-she-goes account of Fed policy with an acknowledgement of intensifying risks, Yellen said there are good reasons to believe the United States will stay on a path of moderate growth that will allow the Fed to pursue "gradual" adjustments to monetary policy.

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Investors have all but ruled out a rate hike for the rest of the year, but Yellen's comments kept the central bank's options open. U.S. stock markets opened higher and the dollar crept up as well.

"Yellen seems to be maintaining her faith in the outlook of the U.S. economy and still anticipates to raise rates," said Joe Manimbo, senior market analyst with Western Union Business Solutions.

Photos of Federal Reserve Chair Janet Yellen:

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Federal Reserve Chair Janet Yellen
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Fed's Yellen says global risks could pose U.S. growth threat
Federal Reserve Chair Janet Yellen coughs and takes a long pause during a speech at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Janet Yellen, chair of the U.S. Federal Reserve, pauses while speaking during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Janet Yellen, chair of the U.S. Federal Reserve, speaks during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
Attendees applaud as Janet Yellen, chair of the U.S. Federal Reserve, not pictured, concludes her speech during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Federal Reserve Chair Janet Yellen is assisted down from the podium by University of Massachusetts economics professor Michael Ash after a speech at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen, left, pauses as University of Massachusetts economics professor Michael Ash, right, watches after her speech, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
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Family incomes and wealth are rising, domestic spending "has continued to advance," and business investment outside the oil sector accelerated in the second half of the year, Yellen said. The Fed chair said she expects the labor market to continue to improve and inflation eventually rise toward the Fed's target despite a recent drop in inflation expectations that has concerned some policymakers.

But Yellen acknowledged that some of the weaknesses in the global economy have become self re-enforcing, with weak growth in major manufacturers like China and oversupply on commodity markets rattling the world's oil and mineral exporters. A broad sense of a world slowdown, in turn, and uncertainty about the depth of China's problems, has tightened financial conditions for U.S. businesses.

"These developments if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said in remarks prepared for her semi-annual appearance before the House Committee on Financial Services. A hearing before the committee began at 10 a.m..

An accompanying report said the U.S. financial sector "has been resilient" to stress from oil and weakening corporate debt markets around the world, with "limited" exposure among large U.S. banks. But "if conditions in these sectors worsen...wider stresses could emerge."

Yellen singled out uncertainty over recent changes in China's currency policy and the prospects for its economy as a particular culprit behind recent financial market volatility, with the potential to drag down other countries dependent on commodity and other exports to China.

"Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial markets could tighten further," she said.

Nevertheless, Yellen held firm to an overall sense that U.S. growth would continue, and that the world would eventually fall in step.

"Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending," Yellen said. And with other central banks maintaining loose monetary policy, "global economic growth should pick up over time."

The Fed "expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen," Yellen said.

The Fed in December raised interest rates for the first time since the 2007 to 2009 financial crisis and recession, ending a seven-year run near zero. Policymakers at the time anticipated four more hikes this year, though investors have discounted that amid the risks cited by Yellen and continued low inflation in the United States.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Dion Rabouin; Editing by Andrea Ricci)

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RELATED: Photos from when the Federal Reserve raised key interest rates
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Federal Reserve raises key interest rates for first time since 2006, Janet Yellen, markets react
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Fed's Yellen says global risks could pose U.S. growth threat
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react after it was announced that they Federal Reserve would increase interest rates December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react after it was announced that they Federal Reserve would increase interest rates December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
Traders work as Janet Yellen, chair of the U.S. Federal Reserve, is seen speaking on a television screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, Dec. 16, 2015. The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be 'gradual' and in line with previous projections. Photographer: Michael Nagle/Bloomberg via Getty Images
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
Pedestrians walk past the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, Dec. 16, 2015. The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be 'gradual' and in line with previous projections. Photographer: Michael Nagle/Bloomberg via Getty Images
WASHINGTON, USA - DECEMBER 16: Federal Reserve Chairwoman Janet Yellen holds a news conference after the Federal Reserve made the announcement that it was raising its interest rate in Washington, USA on December 16, 2015. The raising of rates a quarter point comes seven years after they dropped the rates to near zero during the financial crisis. (Photo by Samuel Corum/Anadolu Agency/Getty Images)
Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, Dec. 16, 2015. The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be gradual and in line with previous projections. Photographer: Andrew Harrer/Bloomberg via Getty Images
Federal Reserve Chair Janet Yellen speaks during a press conference following the announcement of an historic rate increase, the first since 2006, in Washington, DC, December 16, 2015. The Federal Reserve announced Wednesday its first interest rate increase in more than nine years in a landmark move signaling the US has finally moved beyond the 2008 crisis. The Fed raised the benchmark federal funds rate, locked near zero since the Great Recession, by a quarter point to 0.25-0.50 percent, saying the economy is growing at a moderate pace and should accelerate next year. AFP PHOTO / SAUL LOEB / AFP / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
WASHINGTON, DC - DECEMBER 16: Federal Reserve Bank Chair Janet Yellen holds a news conference where she announced that the Fed will raise its benchmark interest rate for the first time since 2008 at the bank's Wilson Conference Center December 16, 2015 in Washington, DC. With unemployment at 5-percent and the economy showing signs of strength, the Fed raised the interest rate a quarter of a percentage point and many experts believe the interest rate on short-term loans could go as high as one percent by the end of 2016. (Photo by Chip Somodevilla/Getty Images)
NEW YORK, NY - DECEMBER 16: A trader works on the floor of the New York Stock Exchange (NYSE) following an announcement that the Federal Reserve will raise interest rates for the first time in nearly a decade on December 16, 2015 in New York, United States. The Fed approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent. (Photo by Spencer Platt/Getty Images)
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, Dec. 16, 2015. The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be 'gradual' and in line with previous projections. Photographer: Michael Nagle/Bloomberg via Getty Images
CHICAGO, IL - DECEMBER 16 : A trader in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) yawns as he reacts to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, Dec. 16, 2015. The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be 'gradual' and in line with previous projections. Photographer: Michael Nagle/Bloomberg via Getty Images
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
CHICAGO, IL - DECEMBER 16 : Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) react to the Federal Reserves interest rate hike December 16, 2015 in Chicago, Illinois. The Federal Reserves raised the interest rates for the first time since 2006 by 0.25 percentage points. (Photo by Joshua Lott/Getty Images)
NEW YORK, NY - DECEMBER 16: Traders work on the floor of the New York Stock Exchange (NYSE) following an announcement that the Federal Reserve will raise interest rates for the first time in nearly a decade on December 16, 2015 in New York, United States. The Fed approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent. (Photo by Spencer Platt/Getty Images)
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