Yellen 'surprised' at extent of Europe's negative rates

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Washington (AFP)

Federal Reserve Chair Janet Yellen said Thursday she was surprised at how far central banks in Europe have been able to go in reducing short-term interest rates into negative territory.

Speaking hours after Sweden's central bank cut its key interest rate to a new low of -0.5 percent, Yellen said: "I was surprised it was possible to move rates as negative as some countries have done."

Central banks in Europe, including the powerful European Central bank, and the Bank of Japan have taken the extraordinary steps of cutting their base rates into negative territory in recent months to combat deflationary pressures arising from slow growth.

Yellen said in a Senate hearing that the Fed is not planning a similar move even though US inflation remains weak and far below its 2.0 percent target.

She noted that the Fed actually raised its federal funds rate in December, for the first time in more than nine years, as the US economy grows moderately.

Despite the rise in market turmoil since then, the Fed is still more biased toward increasing, rather than decreasing, rates, she said.

"A lot has happened since then. Global economic and financial developments impinge on the outlook. We are in the process of evaluating how those developments affect our outlook," she said.

Even so, she added, "I have not thought that a downturn sufficient to cause the next move to be a cut was likely."

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