Fed chief pledges continuity on stimulus retreat

New York TimesFebruary 11, 2014 

YELLEN TESTIMONY

In her semi-annual report on monetary policy and the outlook for the U.S. economy, Federal Reserve Chairwoman Janet Yellen told the House Financial Services Committee on Tuesday that more work is needed to restore the labor market to health. She pledged to maintain current policies to ensure a return to full employment and stable prices.

DREW ANGERER — Bloomberg

— Janet L. Yellen, the new chairwoman of the Federal Reserve, told Congress on Tuesday that the central bank maintains its optimistic view of the economy and its determination to retreat slowly from its stimulus campaign.

Yellen’s first public remarks as chairwoman were hard to distinguish from the last public remarks of her predecessor, Ben S. Bernanke. Speaking to the House Financial Services Committee, she emphasized that she was not seeking to change the Fed’s course.

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” said Yellen, who was the Fed’s vice chairwoman, referring to the Federal Open Market Committee, which sets monetary policy. “I served on the committee as we formulated our current policy strategy, and I strongly support that strategy.”

Yellen reiterated the Fed’s optimistic assessment that economic growth will strengthen this year, giving no sign the Fed is concerned about a recent spate of weak economic reports, including slow job growth in December and January.

“The economic recovery gained greater traction in the second half of last year,” she said, citing the growth of spending by consumers and businesses. She said the Fed continued to expect “that economic activity and unemployment will expand at a moderate pace this year and next.”

Yellen also downplayed concerns about turbulence in emerging markets such as Turkey, which has been exacerbated by the Fed’s retreat.

“We have been watching closely the recent volatility in global financial markets,” she said. “Our sense is that at this stage, these developments do not pose a substantial risk to the U.S. economic outlook.”

Disagreement on interest rates

Yellen also highlighted the Fed’s regulatory responsibilities saying, “The work of making the financial system more robust has not yet been completed.”

Yellen answered questions from the House committee Tuesday and is scheduled to testify before a Senate committee Thursday. The Fed reports to Congress twice a year about its conduct of monetary policy.

The economy remains badly scarred by the financial crisis. Growth is tepid, unemployment high and inflation sluggish. Yellen is widely seen as regarding the Fed’s ability to improve that situation somewhat more favorably than Bernanke.

Her testimony, however, touched lightly on the critical questions confronting the Fed.

The central bank said in 2012 that it planned to keep short-term interest rates near zero at least as long as the unemployment rate remained above 6.5 percent. It has since said that it is likely to maintain that policy well past that threshold, but with the unemployment rate reaching 6.6 percent in January, a number of Fed officials have said there is a need for greater clarity about its plans.

To provide that clarity, however, the Fed must first resolve an internal debate. The unemployment rate has declined in large part because people have stopped looking for work. The share of Americans with jobs has not increased since the recession.

Incomplete recovery

Some Fed officials argue that many people are likely to return to the labor market as the economy improves, so the unemployment rate will fall more slowly and the Fed will need to maintain its efforts for longer.

Others see evidence that demographic shifts, such as the aging of the baby boom generation born from 1946 to 1964, have permanently reduced labor force participation, and therefore argue that the Fed should retreat from its efforts more quickly.

Yellen has said previously that she sits in the first camp, regarding the decline in the labor force primarily as a temporary phenomenon caused by the recession. But she did not directly address the issue in her prepared testimony Tuesday, saying only, “The recovery in the labor market is far from complete.”

Rep. Maxine Waters of California, the ranking Democrat on the House committee, said in a statement Tuesday that the Fed needed to stay its course.

“I remain concerned that more needs to be done to address the long-term unemployment crisis,” Waters said. “I hope you will press your colleagues on the Federal Open Market Committee to take into account the ongoing impact that this long-term unemployment crisis is having on millions of American families.”

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