As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said the central bank has not completely researched whether that would be legal.

Speaking during her semiannual congressional testimony Wednesday, Yellen said the Federal Open Market Committee (FOMC) discussed charging banks to hold excess reserves at the Fed but never fully researched the issue.

"We didn't fully look at the legal issues around that," she said. "I would say that remains a question that we still would need to investigate more thoroughly."

Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.

"There would seem to be increased fears of recession risks that is resulting in rising in risk premia. We've not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching," she said.

Her testimony comes as speculation grows that the Fed might consider implementing negative rates on what it pays on excess reserves. That would be one option the Fed would have should the current bout of economic softness intensify.

"I do not expect the FOMC is going to be soon in the situation where it's neccesary to cut rates," she said. "Let's not forget, the larbor market is continuing to perofmr well, to improve. I continue to think many of the factors holding down inflation are transitory...We want to be careful not to jump to a premature conclusion about what's in store for the US economy."

Tightening financial conditions driven by falling stock prices, uncertainty over China and a global reassessment of credit risk could throw the U.S. economy off track from an otherwise solid course, Federal Reserve Chair Janet Yellen said on Wednesday in prepared testimony to Congress.

In testimony that combined a steady-as-she-goes account of Fed policy with an acknowledgement of intensifying risks, Yellen said there are good reasons to believe the U.S. will stay on a path of moderate growth that will allow the Fed to pursue "gradual" adjustments to monetary policy.

During a question and answer session, she added that the Fed wouldn't be bound by set benchmarks or guidelines such as the Taylor rule that prescribes rates depending on economic milestones.

"The benefit of a rule-based system is it's systematic and understandable," Yellen said. However, she said her fellow Fed officials believe the rules constitute only a "useful benchmark" but that "we need to take into account a large set of indicators of how the economy is performing."

Family incomes and wealth are rising, domestic spending "has continued to advance," and business investment outside the oil sector accelerated in the second half of the year, she said. Yellen said she expects the labor market to continue to improve and inflation eventually rise toward the Fed's target despite a recent drop in inflation expectations cited by some policymakers as particularly unnerving.

But Yellen acknowledged that some of the weaknesses in the global economy have become self re-enforcing, with weak growth in major manufacturers like China and oversupply on commodity markets rattling the world's oil and mineral exporters. A broad sense of a world slowdown, in turn, and uncertainty about the depth of China's problems, has tightened financial conditions for US businesses.

"These developments if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said in remarks prepared for her semi-annual appearance before the House Committee on Financial Services. A hearing before the committee begins at 10 a.m. (1500 GMT)

An accompanying report said the US financial sector "has been resilient" to stress from oil and weakening corporate debt markets around the world, with "limited" exposure among large US banks. But "if conditions in these sectors worsen...wider stresses could emerge."

Yellen singled out uncertainty over recent changes in China's currency policy and the prospects for its economy as a particular culprit behind recent financial market volatility, with the potential to drag down other countries dependent on commodity and other exports to China.

"Should any of these downside risks materialize, foreign activity and demand for US exports could weaken and financial markets could tighten further," she said.

Nevertheless, Yellen held firm to an overall sense that US growth would continue, and that the world would eventually fall in step.

"Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending," Yellen said. And with other central banks maintaining loose monetary policy, "global economic growth should pick up over time."

The Fed "expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen," Yellen said.

The Fed in December raised interest rates for the first time since the 2007 to 2009 financial crisis and recession, ending a seven-year run near zero. Policymakers at the time anticipated four more hikes this year, though investors have discounted that amid the risks cited by Yellen and continued low inflation in the United States.

First Published:Feb 10, 2016 10:26 PM IST