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Fed Chair Yellen tells Senate panel global economy still vulnerable

Federal Reserve Chair Janet Yellen testifies before a Senate committee on the state of the U.S. economy; nearly 30 percent of Americans lack any emergency savings; and a consumer index says Chick-fil-A is America's favorite fast-food chain
Fed Chair Yellen gives economic snapshot to Senate, and other MoneyWatch headlines 01:07

Federal Reserve Chair Janet Yellen on Tuesday said concerns about the U.S. labor market, global economic growth and low inflation underline the central bank's cautious approach to hiking interest rates.

"We will be watching the job market carefully to see whether the recent slowing in employment growth is transitory, as we believe it is," Yellen said in prepared remarks, delivered to the Senate Committee on Banking, Housing and Urban Affairs.

Yellen's use of the word "whether," marked a slight shift from her previous term of "when" in looking for improvement in the U.S. economy. "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," she said Tuesday.

Making her semiannual monetary policy report to Congress, Yellen summarized how the Federal Open Market Committee (FOMC) was taken off track weeks after hiking rates in December by slowing domestic growth and events overseas, including worries about China's economy and a sharp drop in oil prices.

Given a weak global economy and subdued domestic productivity that are holding down interest rates in the long term, Yellen said the Fed's benchmark overnight interest rate would likely stay low "for some time."

"In short, the Fed chair remains in no rush to raise rates again," Jim O'Sullivan, chief economist at High Frequency Economics, wrote in an emailed note to clients. "We expect the Fed will be tightening again before long, although given the very cautious tone, tightening as soon as July looks quite unlikely, even if the June employment report is quite strong," added Sullivan, who noted that the Labor Department would issue three more employment reports before the September FOMC meeting.

On June 15, Fed policy makers held the central bank's benchmark interest rate unchanged, citing slowing payroll growth in May and April.

Asked by Bob Corker, R-Tennessee, whether the Fed was "embarking on QE4" by reinvesting maturing proceeds held by the Fed, Yellen dismissed the suggestion that the Fed had changed its policy.

"That has long been our policy," Yellen said. "We did say as the economy recovers, a day would come ... when we begin the process of gradually allowing securities to run off our balance sheet."

Asked by Corker whether the Fed had determined whether it had the legal authority to pursue negative rates, Yellen replied that she did believe the central bank could legally pursue the option, but she downplayed the likelihood of the Fed embarking on that path.

Wall Street offered a subdued reaction to Yellen's comments, with benchmark indexes holding modest gains. The Dow industrials (I: DJI) gained 25 points, or 0.1 percent, at 17,830. The S&P 500 (SPX) advanced 6 points, or 0.33 percent, to 2,089. The Nasdaq Composite (COMP) gained 7 points, or 0.1 percent, to 4,844.

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