BackFed must press on with monetary stimulus: Janet Yellen
The chairperson says significant slack remains in US job market and inflation remains below US Fed's goal
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Washington/New York: US Federal Reserve chairperson Janet Yellen told lawmakers the central bank must press on with monetary stimulus programme as significant slack remains in job markets and inflation is still below the Fed’s goal.
“A high degree of monetary policy accommodation remains appropriate," Yellen said on Tuesday in semi-annual testimony prepared for delivery to the senate banking committee. “Although the economy continues to improve, the recovery is not yet complete."
Yellen cited labour market weaknesses even after an unexpectedly fast decline in unemployment put pressure on Fed officials to consider accelerating their timetable for an interest-rate increase. Yellen said on Tuesday that rates are likely to stay low for a considerable period after bond purchases end, which she said could happen following the fed’s October meeting.
While the economy appears likely to rebound from a first-quarter contraction, Yellen said the progress bears close watching. “Signs of labour-market slack include slow wage growth and low labour-force participation," Yellen said. “Housing has shown little recent progress as higher mortgage rates discourage buyers."
The jobless rate fell to an almost six-year low of 6.1% last month, close to the level most Fed officials predicted for the end of the year. Payrolls surged by 288,000 workers, boosting the average monthly advance so far this year to almost 231,000.
Labour participation
Even so, some of the labour-market gauges watched by Yellen show continued weakness. The participation rate, which measures the share of working-age people in the labour force, was 62.8% last month, matching the lowest since 1978. Among the unemployed, about a third have been out of work for six months or longer.
Even before the latest jobs report, Federal Open Market Committee participants raised their projections for the level of the main interest rate over the next two years, while continuing to predict that the first increase would occur next year.
Their median estimates, released last month, called for an increase to 1.13% at the end of 2015 and 2.5% a year later. In March, they estimated that the rate would rise to 1% by the end of next year and 2.25% at the end of 2016.
Growth outlook
Economists are predicting growth will snap back from a first-quarter contraction as an improving job outlook and stock-market gains boost consumer confidence and spending.
Gross domestic product (GDP) will expand 3.1 percent from July through December following a 3.3% advance last quarter, according to the median forecast of 74 economists polled by Bloomberg from 3 July through 9 July. It would be the first time since 2004-2005 that GDP has sustained such gains over an extended period.
“Economic activity will expand at a moderate pace over next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth," Yellen said.
A pick-up in inflation toward the central bank’s 2% objective has also prompted some officials to say the Fed may have to consider tightening sooner. The Fed’s preferred gauge, the personal consumption expenditures index, rose 1.8% from a year earlier in May—the most in 19 months.
“Inflation has moved up in recent months but remains below the FOMC’s 2% objective for inflation over the longer run," Yellen said.
Inflation ‘noise’
Officials, including St. Louis Fed president James Bullard and Philadelphia’s Charles Plosser, have said stimulus may eventually fuel inflation beyond the Fed’s goal.
Yellen at her June press conference dismissed the concern, calling recent data on price increases noise.
“There’s a very wide gulf between recent economic data and the Fed’s party line, which is that they’re going to hold the foot to the accelerator a bit longer," Guy LeBas, chief fixed-income strategist in Philadelphia at Janney Montgomery Scott LLC, which oversees $11 billion in fixed-income assets, said before Yellen’s testimony. “The thing that’s going to cause the Fed to accelerate the easing timeframe is inflation risk."
Policymakers, who have kept the benchmark interest rate near zero since December 2008 and ballooned the central bank balance sheet to a record $4.38 trillion, are beginning to plan how they will wind down their unprecedented stimulus.
“The subdued expansion may warrant keeping rates low for some time even after employment and inflation are back to normal levels," Yellen said, while repeating her warning last month that the economic outlook is uncertain and rates also may need to be raised sooner.
Rate path
“Decisions about path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook," Yellen said. “Should the labour market continue improving more quickly than anticipated, rate increases likely would occur sooner and be more rapid than currently envisioned."
Last month, officials continued cutting the monthly pace of asset purchases for a fifth straight meeting, with a reduction of $10 billion, to $35 billion. Officials agreed to end the purchases with a final reduction of $15 billion after their October meeting if the economy progresses as they expect, according to minutes of the June gathering released last week. Also last month, policymakers moved closer to deciding on the main tool they will use to tighten policy when the time comes.
Excess reserves
Most FOMC participants agreed the interest rate on excess reserves that banks deposit at the Fed should play a central role. Another tool, known as the overnight reverse repurchase facility, could play a useful supporting role, according to the minutes. Officials also agreed that they must monitor markets for signs of froth and use supervisory measures if necessary to address excessive risk-taking and associated financial imbalances.
Yellen said real estate, equity, and corporate-bond valuations remain generally in line with historical norms, while flagging lower-rated corporate debt as a market where valuations appear stretched.
“We are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance," she said.
Monetary policy report
In a monetary policy report accompanying her testimony, Fed officials said since issuing supervisory guidance on leveraged lending practices last year, there has been strong supervisory follow-up to ensure compliance. The Fed and other US regulators also are working to implement the Dodd-Frank Act four years after it became law.
The law, signed by President Barack Obama in July 2010, expanded US Fed’s power to oversee the largest financial institutions and gave regulators new tools aimed at preventing a repeat of the 2007-2009 financial crisis. It imposed new rules on derivatives, limits the ability of banks to trade on their own account and new rules for mortgages.
Yellen, 67, served as a Fed governor, San Francisco Fed president and Fed vice chair before succeeding Ben S. Bernanke in February. She is scheduled to appear before the House Committee on Financial Services on Wednesday at 10am in Washington. Bloomberg
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