Yellen stands by Fed’s low rates

Associated PressNovember 14, 2013 

— Janet Yellen made clear Thursday that she’s prepared to stand by the Federal Reserve’s extraordinary efforts to pump up the economy when she’s chairwoman, if that’s what it needs.

During a two-hour confirmation hearing before the Senate Banking Committee, Yellen embraced her so-called “dovish” reputation and expressed strong support for the Fed’s low interest rate policies. And she warned critics that any potential harm those policies pose are outweighed by the risk of leaving a still-weak economy to survive without them.

“I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” she said.

Yellen faced tough questions, particularly from Republicans. But she also drew praise from senators in both parties and is expected to be confirmed by the full Senate, becoming the first woman to lead the powerful central bank.

A committee aide said Banking Chairman Tim Johnson, D-S.D., plans a vote as soon as possible, potentially next week.

“We have the utmost respect for you,” Sen. Joe Machin, a centrist Democrat from West Virginia, told Yellen.

Her testimony represented a strong defense of the Fed’s policies pursued under Chairman Ben Bernanke, which were launched to combat the recession and the financial crisis.

The latest efforts include spending $85 billion a month on bond purchases, which are intended to lower long-term interest rates and promote faster economic growth.

The Fed has also said it plans to keep its key short-term rate near zero at least until unemployment falls to 6.5 percent. The rate is now 7.3 percent.

GOP: Economy on ‘sugar high’

Some Republicans expressed concerns at the hearing about the bond purchases, which have swelled the Fed’s balance sheet to $3.8 trillion. They are worried that the money flooding into the financial system is inflating stock and real estate prices. And that could be creating asset bubbles, which would have a disastrous impact on the economy if they burst.

“I think the economy has gotten used to the sugar you have put out there, and I just worry that we are on a sugar high. That is a very dangerous thing,” said Sen. Mike Johanns, R-Neb.

Yellen repeatedly assured senators that the Fed is mindful of those risks. But she cautioned that there were other dangers if the Fed pulled back prematurely. The economy could weaken further, and unemployment could rise.

Pressed by Republicans to specify when the central bank might begin scaling back the bond purchases, Yellen didn’t bite.

She said Fed policymakers assess the risks and benefits of the bond purchase program each time they meet.

“The committee is looking for … signs of growth that are strong enough to promote continued progress” in the labor market. She said “there is no set time that we will decide to reduce the pace of our purchases.”

Policies likely to continue

The Fed has said that it wants to see stronger data before it reduces the stimulus. Recent reports have been encouraging.

The government said last week that the economy added 204,000 jobs in October and many more in the previous two months than initially reported. And the economy grew at a 2.8 percent annual rate from July through September, the fastest pace in a year.

Yellen told senators that the economy has regained ground lost to the recession. But it still needs the Fed’s support because unemployment remains too high.

She also praised Bernanke for his “wise and skillful leadership.”

Private economists viewed Yellen’s comments as a strong signal that Bernanke’s policies will continue at the Fed.

“Janet Yellen’s responses in the Senate Q&A session were as dovish as expected,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The central bank’s last meeting of the year is Dec. 17-18, and it will meet again in January, which will be Bernanke’s last meeting as chairman. He steps down on Jan. 31 after eight years at the helm.

Many economists believe that the earliest the Fed would begin reducing the bond purchases is at the March meeting. That would be Yellen’s first as chairwoman, presuming she is confirmed by then.

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