Yellen stresses continuity on Fed policy

Tuesday 11 February 2014 17.28
Janet Yellen says that US recovery is  'far from complete'
Janet Yellen says that US recovery is 'far from complete'

New Federal Reserve Chair Janet Yellen has said that she had no plans to change monetary policy from that mapped out by her predecessor.

Sticking to the Fed's playbook of the past year, Yellen, who took the helm of the US central bank at the beginning of this month, stressed that unemployment continues to be a problem and held the focus of Fed policy makers.

In her first public comments on policy as chair, Yellen said that with the economy expected to grow this year and next at a moderate pace, the Fed would continue to slowly reel in its huge stimulus.

But she stressed that that was also contingent on the labour market, where recovery remains "far from complete."

And she allowed that the Federal Open Market Committee, the Fed's policy-making body, could weigh when it meets in March a pause to the taper of the current $65 billion a month bond-buying program if economic conditions showed a significant deterioration. 

"I expect a great deal of continuity in the FOMC's approach to monetary policy," she told the Financial Services Committee of the US House of Representatives.

"I served on the committee as we formulated our current policy strategy and I strongly support that strategy," she said.

Yellen, the former Fed vice chair and Ben Bernanke's close ally for the past three years, described an economy in fairly good shape, with inflation subdued and no significant danger from the turmoil in emerging markets, some of it sparked by the Fed's stimulus cutbacks.

The recent bouts of volatility around the world "do not pose a substantial risk to the US economic outlook," she told the panel.

However, in an acknowledgement of the poor job growth numbers of the past two months that appeared to contradict the sharp fall in the unemployment rate, she stressed that the Fed still sees serious problems in the jobs market.

Even at January's 6.6%, the unemployment rate is "still well above" the level that FOMC policymakers think would be a strong and sustainable level.

She stressed that the number of people forced to work part-time because they cannot find a full-time job "remains very high."

In addition, she said, there is still a large number of people who have been jobless and looking for a job for more than six months.

In December 2012 the Fed set a reference unemployment rate for winding up its quantitative easing stimulus and beginning to tighten monetary policy overall at 6.5%, which it expected to be achieved only later in 2014.

But the jobless rate has fallen much faster than expected, from 7.9% in January 2013 to the 6.6% level hit last month.

At the same time, job creation has not been as strong as hoped, and in the past two months has been strikingly weak.

Economists explain the divergence as representing more people just dropping out of the market, and so not counted as unemployed, rather than people getting jobs.

Asked by legislators about the December and January jobs reports, Yellen cautioned that it was "very important to not jump to conclusions." She said that it might it eventually prove that severe winter storms had tamped down hiring.

"It's important for us to take our time to assess what the significance of this is," she said.

At the same time, she pointed to the high numbers of long-term unemployed and the high number of those with part-time work to suggest the FOMC will not begin tightening, or increase its benchmark interest rate, now at 0-0.25%, if the 6.5% unemployment rate is hit soon.

Crossing that threshold "will not automatically prompt an increase in the federal funds rate," she said.

Yellen also stressed that inflation remained tame, while suggesting there was little threat of deflation.

Although the inflation rate has been a low one percent, far from the FOMC target of two percent, she said that the recent weakness was likely "transitory," influenced by falling prices for crude oil and for non-oil imports.

Analysts took Yellen's message of her arrival not bringing a change to monetary policy at face value.

"Her statement was effectively an expanded version of the last FOMC statement, with no new signals," said Jim O'Sullivan, chief US economist at High Frequency Economics.

"In short, recent data and events have not changed the Fed's game plan. A smooth transition from the Bernanke era."