(Reuters) - Unusually harsh winter weather
appears to be behind recent signs of weakness in the U.S. economy,
Federal Reserve Chair Janet Yellen said on Thursday, suggesting the
central bank was poised to press forward in ratcheting back its
stimulus.
Testifying to the Senate Banking Committee, Yellen said the Fed
would watch carefully to ensure weather was indeed the culprit, but
she reiterated that it would take a "significant change" to the
economy's prospects for the Fed to put plans to wind down its
bond-buying program on hold.
Heavy snowstorms and cold snaps have hit U.S. employment, retail
sales and manufacturing. The world's largest economy added fewer
than 200,000 jobs combined in December and January, well below
expectations. Some investors think the Fed could alter its plans if
a report on February hiring next week shows similar weakness.
"It's really quite a range of data that has been soft recently. I
think it's clear that ... unseasonably cold weather has played some
role in much of that," Yellen, the Fed's former vice chair who took
the reins on February 1, told lawmakers.
"What we ... will be doing in the weeks ahead is to try to get a
firmer handle on exactly how much of that set of soft data can be
explained by weather and what portion, if any, are due to a softer
outlook," she said.
After more than five years of ultra easy monetary policy in the wake
of the 2007-2009 recession, the Fed is taking the first small steps
towards a more normal footing. It trimmed its bond buying by $10
billion in each of the past two months, and it expects to raise
interest rates some time next year as long as the economy continues
to improve.
Yellen reiterated her concerns about possible asset price bubbles,
and suggested the Fed would move to a more qualitative description
of when it plans to finally raise rates.
But her most revealing comments were on the bond purchases, which
she said the Fed still intended to end sometime in the fall,
although they were not on a "preset course."
Asked by New York Senator Charles Schumer if the Fed would consider
changing the rate of taper if weather turned out not to be the main
factor in recent economic weakness, Yellen said the central bank
would be open to reconsidering if the outlook changed significantly.
"But I wouldn't want to jump to conclusions here," she said.
The Fed has held rates near zero since late-2008 and it has pumped
up its balance sheet to more than $4 trillion with its asset
purchases. It is currently buying bonds at a pace of $65 billion per
month, and will decide its next move at a meeting on March 18-19.
Reaction in financial markets was muted, with U.S. stocks gaining
ground and the dollar drifting lower against the euro.
"I think the prevailing wisdom remains that there is a high hurdle
to deviating from the current $10 billion per meeting taper
trajectory," Stephen Stanley, chief economist at Pierson Securities,
wrote to clients.
Senators on the committee also asked about financial regulation and
the possibility that the accommodative monetary policy could inflate
asset-price bubbles.
Yellen acknowledged that such low borrowing costs "can give rise to
behavior that poses threats to financial stability."
"Therefore we need to be looking at that very carefully and we are
doing so in a very thorough way," she said.
The debate is heating up over whether the Fed should stand ready to
raise rates earlier than expected to head off risky behavior that
could imperil financial stability.
The central bank is monitoring the growth of credit and leverage for
"potential worrisome trends," Yellen said.
"I would say at this stage I don't see concerns, but there are
pockets of a few things that we've identified that do concern us,"
she said.
"For example, underwriting standards and leveraged lending clearly
appear to be deteriorating. We have addressed that with supervisory
guidance and special exams and will continue to be very vigilant in
that area."
Another challenge on the Fed's horizon is adjusting a policy
promise, repeated last month, to keep rates near zero until well
after the U.S. jobless rate falls below 6.5 percent. Unemployment
was very close to that threshold at 6.6 percent in January, so Fed
policymakers have suggested they want to find another way to
telegraph their intentions.
"There is no hard and fast rule about what unemployment rate
constitutes full employment and we need to consider a broad range of
indicators," Yellen said.
"Many members of the committee have emphasized this point and it's
one I agree with," she added. "It moves in the direction of
qualitative guidance."
(Additional reporting by Lucia Mutikani, Ann Saphir, Elvina Nawaguna
and Bill Trott; Editing by Chris Reese, Tim Ahmann and Andrea Ricci)
