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 In her first public comments since becoming Fed chief earlier this
month, Yellen had testy exchanges with some Republican lawmakers
over Wall Street regulation and central bank independence. But she
managed to keep financial markets calm by emphasizing continuity
with the policy approach taken by her predecessor, Ben Bernanke.
Yellen said the central bank must keep its eye on the "unusually
high" incidence of long-term unemployment and the "exceptionally
high" proportion of Americans who can find only part-time work as it
plots a tricky reversal of its very accommodative policy stance.
"By a number of measures our economy is not back, the labor market
is not back, to normal," Yellen told the U.S. House of
Representatives' Financial Services Committee. "There's a great deal
of slack in the labor market still."
Under Bernanke, the Fed bought trillions of dollars in bonds to
drive borrowing costs lower and spur investment and hiring, swelling
its balance sheet to more than $4 trillion. In December, it decided
to begin scaling back its support given a drop in unemployment and
stronger economic growth.
Since then, however, signs have emerged of a sharp slowdown in jobs
growth, leading some investors to wonder whether the Fed might put
the wind-down of its bond-buying program on hold.
But Yellen showed little inclination to change tack. She said the
Fed would likely take "further measured steps" to curb its stimulus
if data broadly supports policymakers' expectation of improved labor
markets and a rise in inflation, and she cautioned against reading
too much into recent jobs figures.
Prices for U.S. government bonds slipped and stocks rose, with major
indexes closing up more than 1 percent, as investors saw few
surprises in Yellen's comments.
"It's very obvious she is working from the same playbook as
Bernanke," said Tom Porcelli, chief U.S. economist at RBC Capital
Markets in New York.
ACCOLADES AND BARBS
In only her second week on the job after serving for more than three
years as the Fed's vice chair, Yellen received accolades from both
Republicans and Democrats on being the first woman to lead the
central bank in its 100-year history.
But during the unusually long hearing on the Fed's semi-annual
monetary policy report, she referred to notes and appeared
uncomfortable at times in addressing sharp questions on regulation.
At one point during the more than four hours of questioning, Yellen
said she would have to study the details on a ban on bank
proprietary trading before advising on how lawmakers might want to
adjust the so-called Volcker Rule.
Yellen, who was appointed to chair the Fed by President Barack
Obama, was cut off at times by committee Chairman Jeb Hensarling and
other Republicans as she tried to patiently explain the central
bank's two-pronged approach to supporting the economic recovery:
buying bonds and promising low interest rates for a while to come.
The Fed has trimmed its monthly asset purchases by $10 billion at
each of its last two policy meetings; it now buys $65 billion in
Treasuries and mortgage bonds per month, and it expects to shutter
the program by later this year.
Yellen said the purchases were not on a pre-set course, but added
that it would take "a notable change in the outlook" for Fed
policymakers, who next meet on March 18-19, to set aside their plan
to wind down the program.
As for the possibility of actually increasing their bond buying, she
said it would take a "significant deterioration" in the outlook for
the job market, or very serious concerns that inflation was not
moving higher over time. Inflation is running at just 1.1 percent,
well shy of the Fed's 2 percent target.
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Yellen nodded to the recent volatility in global financial markets,
where some emerging market currencies and stocks have sold off in
recent weeks, but she said at this stage it did "not pose a
substantial risk to the U.S. economic outlook."
EYE ON JOBS MARKET
More than five years after the 2007-2009 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 convincing investors that interest rates will stay near
zero well into next year.
Having lowered rates to near zero in the depths of the crisis in
late 2008, the Fed has said it does not expect to raise them until
well after the time the jobless rate drops below 6.5 percent,
especially if inflation remains weak.
But unemployment has already reached 6.6 percent, down from 8.1
percent when the Fed launched the latest bond-buying program in
2012, and policymakers are scrambling to decide how best to adjust
their guidance.
A shaky run of recent data, including two straight months of weak
jobs growth, has raised questions over whether the economy can
sustain the strength it showed in the second half of last year.
Gross domestic product grew at a 4.1 percent annual rate in the
third quarter and at a 3.2 percent pace in the fourth quarter.
"We have to be very careful not to jump to conclusions in
interpreting what those reports mean," Yellen said, referring to the
jobs data, which she said may have been impacted by unusually cold
winter weather.
While Yellen said the unemployment rate remained "well above" the
central bank's target level, she also said a "significant" part of
the fall in labor force participation was "structural" and,
therefore, permanent. That would mean the jobless rate commensurate
with full employment has risen.
At the hearing, Republicans aired their concerns that the Fed's
aggressive easing of monetary policy had raised the risks of a
troubling bout of inflation and asset bubbles, and made it easier
for the government to run large budget deficits.
Hensarling said the Fed's promise to keep rates low well into the
future was a noticeable departure from a decades-old monetary policy
rule of thumb that Yellen once called the mark of a "sensible"
central bank.
"So that begs the question today, using your words, are you a
sensible central banker, and if not, when will you become one?," he
asked.
"Congressman, I believe that I am a sensible central banker," Yellen
replied.
(Reporting by Jonathan Spicer and Jason
Lange; additional reporting by Margaret Chadbourn and Lucia Mutikani
in Washington and Ann Saphir in San Francisco; editing by Andrea
Ricci, Timothy Ahmann and Paul Simao)
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