Chinese economy facing considerable challenge: Yellen

China continues to face considerable challenges even though concerns about its slowing growth appear to have eased from earlier this year, Federal Reserve Board Chairwoman Janet Yellen said today.
"Although concerns about slowing growth in China and falling commodity prices appear to have eased from earlier this year, China continues to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth," Yellen told lawmakers.
"More generally, in the current environment of sluggish growth, low inflation and all-ready very accommodative monetary," she said, during her testimony before the Senate Committee on Banking, Housing and Urban Affairs.

Yellen said while considering future policy decision, the Fed will continue to carefully monitor actual and expected progress toward its inflation goal.
"Of course, considerable uncertainty about the economic outlook remains. The latest readings on the labour market and the weak pace of investment illustrate one downside risk that domestic demand might falter," she said.
"In addition, although I'm optimistic about the longer run prospects for the US 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," Yellen said.

The Federal Board Chairwoman said proceeding cautiously in raising the federal funds rate will allow the US to keep the monetary support to economic growth in place while they asses where the growth is returning to a moderate pace, whether the labour market will strengthen further and whether inflation will continue to make progress toward the two percent objective.

"Another factor that supports taking a cautious approach in raising the federal funds rate, is that the federal funds rate is still near its effective lower band. If inflation were to remain persistently low or the labour market were to weaken the Committee would have only limited room to reduce the target range for the federal funds rate," she said.
"However if the economy were to overheat, and inflation seemed likely to move significantly or persistently above two per cent, the FOMC could readily increase the target range to the federal funds rate," she said.
Yellen said the FOMC continues to anticipate that economic conditions will improve further, and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate.

"In addition, the Committee expects that the federal funds rate is likely to remain for some time below the levels that are expected to prevail in the longer run because headwinds, which include restraint on US economic activity from economic and financial developments abroad, subdued household formation and meager productivity growth mean that the interest rate needed to keep the economy operating near its potential is low by historical standards," she said.
"If these headwinds slowly fade over time, as the Committee expects, then gradual increases in the federal funds rate are likely to be needed," she said.
In line with that view, most FOMC participants based on their projections prepared for the June meeting anticipate the values for the federal funds rate of less than one per cent at the end of this year and less than two per cent at the end of next year will be consistent with their assessment of appropriate monetary policy," Yellen said.