US Must 'Be Prepared' For Negative Rates

The head of America's central bank has admitted that even the world's biggest economy needs to "be prepared" for the possibility of negative interest rates as countries around the world slash them to below zero.

US Federal Reserve chair Janet Yellen said she did not think a downturn bad enough to produce a cut in its interest rates was likely but added that the Fed was studying the possibility of negative rates.

Ms Yellen's remarks came on the second day of her closely-watched testimony before the US Congress, which has already sent markets into a fresh downward spiral after she acknowledged on Wednesday that tough global conditions could hamper US growth.

The Fed lifted US interest rates from near-zero in December for the first time since the financial crisis as it judged that the economy was ready to be weaned off the unprecedented monetary stimulus that had nursed it out of the downturn.

But since then the global outlook has turned gloomier amid worries about China, a deepening oil price plunge, and slide in world stock markets.

Central banks in Europe and Japan have already adopted negative interest rates in response to slowdown concerns with Sweden - already at below zero - cutting further on Thursday to minus 0.5%.

Ms Yellen told US legislators: "I was surprised it was possible to move rates as negative as some countries have done."

The Fed chair believes America is on course for continued moderate growth and said it was not planning a similar move. She (Munich: SOQ.MU - news) said it was still leaning towards increasing rather than cutting rates, though it was still weighing how the latest turmoil will affect the US.

But when asked if the central bank could consider negative rates, she said: "We are taking a look at them again because we would want to be prepared."

Ms Yellen was broadly optimistic about prospects for US growth.

She said: "We are watching developments very carefully. I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don't die of old age."

Ms Yellen acknowledged financial market concerns and the downward pressure on US inflation caused by falling oil prices.

"These factors may well influence the balance of risks or the trajectory of the economy and thereby might affect the appropriate stance of policy," she said. "But at this point it's premature to make a judgment on that."