Federal Reserve Chairwoman Janet Yellen defended the central bank Thursday from criticism that it decided against raising its target interest rate this week in reaction to a falling and uncertain stock market.
“We don’t want to respond to market turbulence,” Yellen said at a press conference following the Fed’s two-day meeting in Washington. “The Fed should not be responding to the ups and downs of the markets. And it is certainly not our policy to do so.”
Nevertheless, she said, it is sometimes necessary to do so if the stock market turmoil reflects real underlying problems with the economy.
“When there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them,” she said.
The Fed held rates near zero, where it has kept its target since the financial crisis, citing “[r]ecent global economic and financial developments.”
Specifically, Yellen mentioned that stock markets, which have seen wild volatility over the past month, could be responding to the possibility of a slowdown in China and emerging markets.
Those developments could have ripple effects for economies that sell commodities to China. That in turn could push up the dollar and lower commodity prices, lowering U.S. inflation, which the Fed is trying to raise to 2 percent.
In addition, China’s slowing economy could hurt U.S. growth, if the ultimate effect is to slow U.S. exports. Yellen cited the potential impact on U.S. trade partners, including not just emerging markets but also Canada, specifically, which is currently in a recession.
The Fed has been criticized in the past for the perception that it is more responsive to Wall Street and stock markets than to real conditions in the U.S. economy, such as unemployment and income growth.
