Janet Yellen helps the world calm down and take stock: Don Pittis

Thank goodness for the calming effect of U.S. Fed chair Janet Yellenas she testified to Congress Wednesday.

And thank goodness it is a level-headedYellenin charge of the world's most influential central bank, and not members of Congress, most of whose questions seemed either irrationally hostileor utterly irrelevant.

• Fed not currently considering negative interest rate policy, Yellen says
• North American stock markets search for direction

In the face of growing over-excitement in the world's financial markets, Yellen was, in her practical way, able to make a strong case that the United States is not going to hell in a hand-basketand that its central bank is in safe hands.

The issue, raised by some of her congressionalquestioners, is whether Yellen'squarter-point rate increase in December the first after seven years close to zero came too soon.

The sentiment echoes a number ofmarket commentators who fear the U.S. may once again be heading for recession.

Facing headwinds

Trouble overseas, especially currency uncertainty in China, may be causing increased "headwinds" for U.S. growth, Yellen said, but she was in no mood to backtrack on her pledge to gradually increase interest rates over the coming year.

Unperturbed andmerely stating the facts during her semi-annual report to Congress, she was convincing.

Yellen conceded thata decline in drilling wasa drawback for the industrial economy, butdismissed the idea that damage to the oil sector due to falling prices was having a disproportionate effect on employment or the wider economy.

"The fact is that the energy sector is very hard hit," said Yellen. "But with respect to employment, it's a pretty small sector of the workforce overall."

While she may be sympathetic to job losses by individualworkersor as several members of Congress suggested, to high unemployment levels amongst minority groupsthe leversYellen controls aremacroeconomic.

As she had to repeat, her concern is employment and inflationin the overall economy. She has no mechanism to decide which individuals get the jobs.

What's more, as she and otherspointed out, theU.S. unemployment rate has fallen to five per cent a levellastseen in late 2007before the global financial crisis took hold and wagesare rising.

While several congressional members argued that five-per-cent unemployment is not an accurate measure of truejoblessness, it is the same statistic used in 2007and is measured in the same way.

Yellenalso made it clear that the falling price of oil was a good thing for the average American household,increasing annualspending power by $1,000 due to cheaper gasoline, heating fuel andtransport costs.

That's good for the economy.

Inflation not dead yet

Falling oil prices also explainYellen'slogic forwhy inflationis far from deadand will therefore requirefurther interest-rateincreases.

The cost of energy is embedded in every product Americans consume, from produce grown usingtractors, to goods shipped across the U.S. andfrom around the world. Every time oil and gas prices fall, the price of nearly everything is less than it would have been otherwise. In other words, falling oilprices constraininflation.

A growing number of analysts sayoil could fall further yet, but we are reaching the limit. And prices don't have to rise to end their disinflationary effectthey just have to stop falling.

At that point,Americans will begin to see the full impact of inflationary price increases.

Yellen appeared to backtrack on one point, though: negative interest rates, recently adopted by Japan and previouslyused in Europe.

In past media briefings, the Fed chair has mentioned negative rates could be part of a toolkit ofemergency options if the U.S. economy went into recession. This time she was far more equivocal.

"I am not aware of anything that would prevent us from doing it, but I'm saying we have not fully investigated the legal issues," she said. "That still needs to be done."

Wary of negativerates

Some analysts are blamingrenewed fears in the European banking sector on negative rates, which can distort traditional banking in unpredictable ways. One concern is banks should not expect depositers to accept negative rates, thussqueezing banks between the officialnegativerates, and the money paid out to depositers.

Europe and Japan are in very different circumstances, one withhigh unemployment and theother plagued bydeflation.But both circumstances are quite different from the U.S.

Yellensaid the Fedwould be cautious with negative interest ratesand,in light oftheexperiences in other countries, it was something the U.S.should simplyexamine.

"Not because we think there is a reason to use it," she testified.

"Could the plumbing of the payments system in theUnited States handle it?" saidYellen. "We've notdetermined that."

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