Janet Yellen, in hot-seat testimony to Congress, picks clarity over Fed 'code'

The markets weren't roiled Tuesday by Janet Yellen's first hot-seat testimony to Congress as Fed chair: The 'taper' of bond purchases will continue, but it's too soon to raise interest rates.

Cliff Owen/AP
Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington, Tuesday, before the House Financial Services Committee hearing.

Federal Reserve chiefs may sometimes speak in code, but Janet Yellen, facing Congress for the first time in that role, was pretty clear: She doesn’t see the Fed backing off its “taper” of bond purchases, but she also thinks it’s too soon to think about raising interest rates.

And the stock market was pretty transparent, too: It had no problem with that message.

The Standard & Poor’s 500 index finished up about 1 percent for the day after she spoke to the House Financial Services Committee. The S&P rose on other matters too – notably signs that Congress will be able to take a timely vote to raise its cap on federal debt – but Chair Yellen’s testimony didn’t roil the markets.

Her overall message was to affirm the Fed’s current policies, and to defend them as the right course in an economy that’s improving but far from fully recovered.

She said the Fed expects the economy to grow “at a moderate pace this year and next,” that “too many Americans remain unemployed,” and that “I expect a great deal of continuity in [Fed] monetary policy.”

Her task wasn’t easy, and not just because this was her first time in the hot seat as Fed Chair, answering a battery of questions from lawmakers. She faced pressure from the political right and left, with some criticizing the Fed’s low-interest-rate policies and others urging her to consider greater stimulus for job creation.

The hearing also came amid some uncertainty for the economy, with many forecasters anticipating solid growth ahead but with the latest Labor Department survey showing that just 113,000 jobs had been created in January.

The meeting became lively at the outset, as Rep. Jeb Hensarling (R) of Texas framed a question this way:

“Are you a sensible central banker, and if not, when will you become one?”

Behind his query was a statement she had made at a 1995 Fed meeting, saying that using rules or formulas for monetary policy is “what sensible central banks do.” Hensarling is a proponent of such a rules-based approach to the work of central bankers, which can have wide impacts on the economy for better or worse.

Yellen’s response was essentially “yes” (she thinks she’s a sensible central banker) but that these are extraordinary times.

For example, in order to follow what’s commonly known as a “Taylor rule” for setting the Fed’s short-term interest rate, she said, the Fed would have to make the interest rate negative, “which is impossible.”

“I have always been in favor of a predictable monetary policy that responds in a systematic way” to economic changes, Yellen added.

Where some Republicans blasted the Fed’s near-zero interest rate for imposing hardship on American retirees who can’t earn a decent return on their life savings, some Democrats said the Fed should be doing more – not less – in efforts to stimulate job growth.

She expressed sympathy for the thought behind both questions, but gave no cause to expect dramatic shifts in Fed policy.

As hard as low interest rates are on savers, she said, the best way eventually to normalize those rates is to get the economy growing faster. Trying to raise rates too soon could prolong that process.

For more than a year, the Fed’s policy committee has said it wouldn’t consider a hike in the short-term interest rate until unemployment dipped to 6.5 percent, as long as inflation didn’t exceed 2 percent. Today, with the jobless rate already down to 6.6 percent, Fed officials including Yellen are saying the 6.5 percent rate is not a “trigger” for raising rates.

In practice, Yellen told lawmakers Tuesday, she’ll be looking at a range of labor-market and inflation data to assess when to raise rates. It’s likely the Fed will maintain ultra-low interest rates “well past the time that the unemployment rate declines below 6-1/2 percent,” she said in the written testimony prepared for Tuesday’s hearing.

Rep. David Scott (D) of Georgia decried the nation’s high unemployment rates for groups including young college grads, blacks, and military veterans. “The future of this country is at stake,” he said.

Yellen agreed on the challenge and sided with Representative Scott in voicing opposition to Republican-backed legislation to back away from “full employment” as a congressionally mandated goal for Fed policy.

“I feel very strongly that the Fed’s dual mandate to focus on both full employment and price stability has served this country well,” she said.

If the Fed might try any new efforts to stimulate job creation, Yellen didn’t give any hints of it in the hearing, however.

In fact, the central bank has begun to scale back the size of one monetary stimulus program – the monthly bond purchases designed to add downward pressure on long-term interest rates.

A “taper” policy means these purchases have downshifted from $85 billion per month in December to $65 billion after the Fed’s January meeting.

Yellen suggested that it would take significant deterioration in the outlook for economic growth, or serious concerns that inflation would be too low (below the target of 2 percent a year) to move the Fed off its course of reducing the bond purchases.

The US stock market hasn’t been fazed by the taper policy. And, as the Fed describes it, the bond purchases are still adding monetary stimulus – just at a cooler pace.

Overseas however, the taper has in effect tightened financial conditions, prompting a rise in interest rates in emerging-market nations.

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