Tuesday, June 21, brought the Federal Reserve’s semiannual Monetary Policy Report from Fed Chair Janet Yellen in front of Congress. This was before the U.S. Senate Committee on Banking, Housing and Urban Affairs. In her testimony, Yellen did not make any major directional changes to keeping a very cautious approach.

During the Q&A session, Yellen did address negative interest rates. She said that she believes that the Fed has the legal authority to pursue negative rates, but also that the Federal Open Market Committee (FOMC) is not pursuing negative rates and that it is “not something that is on our list.”

In the current scenario and outlook, Yellen noted that the economy has continued to make progress toward maximum employment. She continued on with the Fed’s go-to line of inflation continuing to run under the 2% target, with the same wording that the FOMC “expects inflation to rise to that level over the medium term.” Still, Yellen warned that the slowing of the labor market improvement suggests that their cautious approach to adjusting monetary policy remains appropriate.

In recent trends, Yellen noted that fewer people have reported to be actively seeking work. Also noted was that economic growth (GDP) has been uneven over recent quarters. Issues cited were subdued foreign growth, the strong dollar weighing on exports, the energy sector’s steep drop and surprisingly weak business investment outside of the energy sector. Still, Yellen talked up the current economy in the second quarter versus the first quarter:

However, the available indicators point to a noticeable step-up in GDP growth in the second quarter. In particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth. And housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.

The recent pickup in household spending, together with underlying conditions that are favorable for growth, lead me to be optimistic that we will see further improvements in the labor market and the economy more broadly over the next few years. Monetary policy remains accommodative; low oil prices and ongoing job gains should continue to support the growth of incomes and therefore consumer spending; fiscal policy is now a small positive for growth; and global economic growth should pick up over time, supported by accommodative monetary policies abroad. As a result, the FOMC expects that with gradual increases in the federal funds rate, economic activity will continue to expand at a moderate pace and labor market indicators will strengthen further.

She continued to maintain the stance that much of the continued inflation target shortfall is tied to declines in energy prices and lower import prices. On the core inflation and expectations, Yellen noted:

Core inflation, which excludes energy and food prices, has been running close to 1-1/2 percent. As the transitory influences holding down inflation fade and the labor market strengthens further, the Committee expects inflation to rise to 2 percent over the medium term. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal.

A lot of effort was given to economic uncertainty and the outlook. Less aggressive growth in the labor market and the weak investment pace illustrate a downside risk where domestic demand might falter. Yellen further maintained that there was no assurance the slow productivity growth seen in recent years will continue into the future.

Some critics have warned that the FOMC now has lost track of what it is really has to worry about. Unfortunately, that remains a growing list of potential issues to consider. Yellen talked about the global economy, China, the Brexit and financial developments. She said:

Vulnerabilities in the global economy also remain. 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. More generally, in the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions. For all of these reasons, the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor markets, and inflation.

Monetary policy was described without being a rate hike hawk. This means only gradual increases to fed funds. Yellen said:

Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 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 bound. If inflation were to remain persistently low or the labor market were to weaken, the Committee would have only limited room to reduce the target range for the federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2 percent, the FOMC could readily increase the target range for the federal funds rate.

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 U.S. 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. If these headwinds slowly fade over time, as the Committee expects, then gradual increases in the federal funds rate are likely to be needed. In line with that view, most FOMC participants, based on their projections prepared for the June meeting, anticipate that values for the federal funds rate of less than 1 percent at the end of this year and less than 2 percent at the end of next year will be consistent with their assessment of appropriate monetary policy.

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Financial markets have not reacted sharply to Yellen’s testimony. The S&P 500 was last seen up almost 6 points at 2,089, and the Dow Jones Industrial Average was up 46 points at 17,850.

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