Optimistic Yellen highlights Brexit as key area of uncertainty

Added 7th June 2016

Despite Friday’s poor jobs numbers, Federal Reserve Chair, Janet Yellen, was positive on the overall labour market in a speech on Monday, but emphasised that monetary policy is not on a pre-set course as there remain some key uncertainties.

Optimistic Yellen highlights Brexit as key area of uncertainty

Admitting that the recent signs of slowdown in job creation bear close watching and that inflation has been lower than the Fed’s objective of 2%, she pointed out that: “The news from the labour market over the past year has been generally good, with significant job gains, the unemployment rate declining below 5%, rising household incomes, and tentative signs of faster wage growth.”

However, she said there are four areas of uncertainty that remain particularly salient: domestic demand, productivity growth, inflation and the economic situation abroad – in particular Brexit.

“One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions,” she said.

On the domestic outlook, she remains optimistic for two reasons: oil prices have stopped declining and indeed have risen from their low point earlier this year, and the dollar has been roughly unchanged against a broad basket of currencies since the beginning of this year.

"As the downward pressure on prices from these two forces dissipates and as the labour market strengthens further, I expect inflation to move back to 2%," said Yellen.

Adrian Lowcock, head of investing at AXA Wealth commented: “Janet Yellen has indicated that the disappointing employment data and concerns over a Brexit as reasons to move cautiously when considering an interest rate rise.

He added: "However, with a recovering oil price and stable US dollar inflation is likely to return to the 2% target and economic activity is expected to continue to recover as concerns over a China slowdown fade. The outlook has improved considerably since the start of the year.”

Specific issues to monitor at the moment include if the situation in Europe and China will take a turn for the worse or exceed expectations; if US productivity growth will pick up and allow stronger growth of GDP and incomes or instead continue to stagnate; and, what will happen with the price of oil?

Lowcock noted that given that a June interest rate rise looks off the cards, for interest rates to rise in July the Fed would need to see a marked improvement in employment data and for the UK to vote to remain in the EU.

"A vote to exit would add additional uncertainty and could impact the US economy which may well stay their hand. However, the Federal Reserve remain broadly positive, so it is a case of when, not if interest rates will rise,” said Lowcock. 

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