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Janet Yellen warns that drop in oil price could affect global economy

Oil prices

Falling oil prices have made a telling contribution on the slowing global economy in recent months but so far it has been countries specialising in the exporting of oil that have felt the the pain.

However, things could soon be about to change, with Janet Yellen, chair of the US Federal Reserve warning that another price drop could see economic problems spread to the rest of the world.

In a recent speech outlining the potential economic risks, Ms Yellen was left to lament the impact of a 64 per cent fall in oil prices over the last two years, adding that further drops would be a substantial weight on the rest of the global economy, which is already facing up to the prospect of a slowdown in China.

She added that while low crude prices may boost US spending and economic activity over the next few years, there was a strong likelihood that oil exporters would cut government spending and while oil companies would continue to shed jobs.

The price of US crude oil dropped $1.11 to $38.28 a barrel on Tuesday, having dropped 7.6  per cent since March 22nd.

Ms Yellen's speech, given at the Economic Club of New York, saw her continue: “The apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms.

“If such downside risks to the outlook were to materialise, they would likely slow U.S. economic activity, at least to some extent, both directly and through financial market channels as investors respond by demanding higher returns to hold risky assets, causing financial conditions to tighten,” she added.

The state of the global economy is likely to a special subject of interest for Yellen, with US economic growth recording strong household spending.

However, things are not looking universally rosey in the American economic garden, with Yellen admitting that the current outlook for the economy was “subject to considerable uncertainty.”

“Gradual increases in the federal funds rate over time will likely be appropriate,” she said.

“That said, this assessment is only a forecast. The future path of the federal funds rate is necessarily uncertain because economic activity and inflation will likely evolve in unexpected ways.”

US stocks were largely up following Yellen's speech, but there will nevertheless be plenty among the country's economic experts about what lies ahead.