Former Federal Reserve Chair Janet Yellen had a surprising forecast Wednesday about the direction the Fed could take next: a rate cut.
“If global growth really weakens and that spills over to the United States, while financial conditions tighten more and we do see a weakening in the U.S. economy, it’s certainly possible that the next move is a cut.”
Most projections for 2019 have included one or as many as two interest rate increases. However, if weak global growth begins to harm the U.S. economy and financial conditions continue to tighten, we could actually get a cut instead of a hike, according to Yellen.
Yellen correctly predicted last month that the Fed would like pause its rate hikes indefinitely, which current Chair Jerome Powell indicated he will do just two weeks later.
Asked on CNBC if it was possible the next move was a cut, Yellen replied: “Of course it’s possible.”
“If global growth really weakens and that spills over to the United States, while financial conditions tighten more and we do see a weakening in the U.S. economy, it’s certainly possible that the next move is a cut,” Yellen added.
The former Fed chief, who now is a distinguished fellow at Brookings, said her own forecast for 2019 was in line with the Fed’s majority in December, who penciled in two rate increases. But she admitted she was very uncertain about that outlook.
Fed Chairman Jerome Powell signaled last week that the Fed is now agnostic about whether the next move will be to move rates up or down. Economists are waiting to see if that forecast is mirrored in the Fed’s next dot plot in March.
The more lenient Fed stance has helped the Dow Jones Industrial AverageDJIA, -0.53% climb 9% this year.
Yellen said she felt the new Fed chairman was on the right track and there was no need for the central bank to “act preemptively” given that inflation is so low and interest rates were “in the range” of neutral, where the level of rates is neither boosting or dampening growth.
So far this year, the economic data remains solid and strong. But growth is expected to slow and there are downside risks, she said.