Yellen vows to continue with tapering policy

February 12, 2014 - 9:04:08 am

Chair of the Federal Reserve Janet Yellen prepares to testify at a House Financial Services Committee hearing on the Fed’s semi-annual Monetary Policy Report to Congress and the state of the US economy in the Rayburn House Office Building in Washington, DC, yesterday.

WASHINGTON: New Federal Reserve Chair Janet Yellen said yesterday the labour market recovery is “far from complete” despite a drop in unemployment, yet she said the US central bank expects to continue trimming policy stimulus in measured steps due to broader improvements in the economy.

In her first public comments as Fed chief, Yellen, giving a balanced testimony to a House committee, nodded to the recent volatility in global financial markets, but said at this stage it does “not pose a substantial risk to the US economic outlook.”

She emphasised continuity in the Fed’s approach to policy, saying she strongly supports the approach driven by her predecessor, Ben Bernanke.

While the unemployment rate has fallen by 1.5 percentage points since the latest bond-buying program began in September of 2012, at 6.6 percent the rate remains “well above levels” the Fed sees as consistent with maximum sustainable employment, Yellen said.

“(T)he recovery in the labor market is far from complete,” she said according to prepared remarks to the Republican-controlled House Financial Services Committee. 

Yellen, in just her second week on the job, cited the “unusually large fraction” of jobless Americans who have been out of work for more than six months, and the “very high” number of part-time workers who would prefer full-time jobs.

“These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the US labour market,” she said.

More than five years after the recession ended, the Fed has embarked on perhaps its most difficult policy shift as it tries to back away from flooding the financial system with ultra-easy money while at the same time convince investors that interest rates will stay near zero well into next year.

Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December; it now buys $65bn in Treasuries and mortgage bonds each month, to keep borrowing costs low and encourage investment and hiring.

Yellen said the Fed will “likely reduce the pace of asset purchases in further measured steps at future meetings” if economic data broadly supports policymakers’ expectation of improved labour markets and a rise in inflation.

She said the purchases are not on a pre-set course, repeating the Fed’s policy line.

A decidedly mixed run of data has raised questions over whether the US economy can sustain the strength it showed in the second half of last year. Unemployment has dropped to 6.6 percent, from 7.9 percent a year ago, yet the fewer than 200,000 new jobs created over the past two months is insufficient to sustain last year’s economic growth. 

The two months of weak US jobs growth and a recent selloff in emerging markets that also hit Wall Street could complicate things for the Fed.

Yellen said the Fed was “watching closely the recent volatility” adding: “Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook. We will, of course, continue to monitor the situation.” Noting inflation remains below the Fed’s 2 percent target, Yellen said “the recent softness reflects factors that seem likely to prove transitory, including falling prices for crude oil and declines in non-oil import prices.”

The Fed will not let inflation run “persistently above or below” its 2-percent goal, she added.

Long concerned with the pain the 2007-2009 recession caused American workers, Yellen is sometimes seen as more dovish than Bernanke and thus willing to do more to stimulate the economy even if inflation could eventually ramp up as a result.

Reuters

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