US Federal Reserve chair Janet Yellen has tried to ease market concerns about impending rate rises saying she will not act precipitously on monetary policy and sees fragility in the markets.
The increasingly dovish language from Dr Yellen comes amid concerns that the recovering US economy remains exposed to the global economic slowdown and potential fallout from a hard economic landing in China.
The Federal Reserve recently signalled rate rises in 2016 had been scaled back from four to two quarter point increases as inflation remained stubbornly low at 1.7 per cent and on a slow track to the target of 2 per cent.
The news encouraged Australian investors with the All Ordinaries index up 0.7 per cent at 5111.6 points.
“Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December,” Dr Yellen told the Economic Club in New York.
“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy.”
The US central bank raised rates from their near zero levels in December for the first time in almost a decade, signalling the emergency from the Wall Street meltdown in 2008 was over.
When the Fed kept rates on hold earlier this month at between 0.25 and 0.5 per cent, it pointed to global market volatility, record low oil prices and concerns about China’s economy.
But Dr Yellen still has an “expectation of fading headwinds”, which will keep the Federal Reserve on track for “gradual increases” as appropriate given that the US economy has proven to be “remarkably resilient.”
“The overall fallout for the US economy from global market developments since the start of the year will most likely be limited,” Dr Yellen said.
Dr Yellen’s comments unexpectedly dovish: Blackrock chief
Growing expectations that US rates will remain on hold for the next few months saw Wall Street stocks rally with the Dow Jones Industrial Average closing 0.56 per cent higher.
The US currency fell and as a result the Australian dollar surged by more than 1 per cent to 76 US cents.
Dr Yellen’s caution reins in comments from other FOMC (Federal Open Market Committee) members that another rate hike was likely in April or June.
Asset managing firm Blackrock’s fixed income chief Jeff Rosenberg said Dr Yellen’s comments were unexpectedly dovish and pushed out rate rise forecasts.
“We’re pricing out expectations and reducing our probability of expectations for when that next interest rate hike is going to come if it ever does come,” Mr Rosenberg told Bloomberg.
Dr Yellen’s dovishess comes as major central banks around the world — including the European Central Bank and the Bank of Japan — pursue a negative interest rates strategy.
Wall Street has finished higher, buoyed by comments from Ms Yellen, who said the central bank should proceed “cautiously on raising interest rates”.
Data from Reuters show traders see a 46 per cent chance the Fed will raise rates by a quarter of a percentage point at its July policy meeting.
The Dow Jones Industrial Average added 0.6 per cent to 17,633.
Technology shares, including Apple and Netflix surged, helping the Nasdaq soar 1.7 per cent to 4,847, while the S&P 500 climbed 0.9 per cent to 2,055.
The Federal Reserve flagged that global risks remain, including uncertainty over China and low oil prices.
Overnight, European stock markets also rose.
In London, the FTSE 100 under-performed, finishing flat at 6,106 as commodity prices fell.
The German DAX gained 0.4 per cent to 9,888, while France’s CAC 40 added 0.9 per cent to 4,367.
Locally, shares are set to follow overseas leads higher, with the ASX SPI 200 up 0.7 per cent to 5,026.