Yellen's House testimony a 'lovefest' compared to past visits
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Fed Chair Janet Yellen’s testimony before the House Financial Services Committee on Wednesday passed with unusual tranquility. Committee Chairman Jeb Hensarling (R-Texas) called the Fed’s recent increases in the federal funds rate and its plan to allow its holdings of U.S. government bonds to decrease “good news."

Committee Democrats spent more time criticizing President Trump than launching tough questions at Chair Yellen. Compared to recent appearances by Yellen, this one might qualify as a lovefest.

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Readers focusing on more dramatic events might be mildly surprised to hear that the economy is actually doing fairly well. The moderate recovery that began way back in 2009 continues to chug along. As Yellen point out, the economy grew a bit more weakly in the first quarter, but showed signs of picking up to a more vibrant clip in the second quarter.

 

Unemployment continued to fall since her last semi-annual report, reaching 4.4 percent. Perhaps more revealing is the broader measure of unemployment that includes people who are not actively job hunting but say they would take a job, as well as people who have part-time work but really want to be working full time.

This number, known to aficionados of the Bureau of Labor Statistics’ data as “U6," is now 8.4 percent, below the 8.6-percent level seen in June 2007, when the crisis had not yet hit us.

The labor market has been especially difficult to read in recent years. Yellen had a brief exchange with Rep. Andy BarrGarland (Andy) Hale BarrFlake's exit gives GOP new hope in Arizona Overnight Defense: Senate panel to get classified Niger briefing | Corker, Trump feud heats up | House passes North Korea sanctions House passes North Korea sanctions MORE (R-Ky.) in which Barr stated the conservative view that much unemployment is due to extensive government benefit programs. Yellen answered briefly that she sees the issue as demographic; the workforce is aging and older workers are either finding it impossible to get work and exiting the labor force, or simply choosing retirement.

In fact, one could add that changes in major government programs, above all the 1996 welfare reform and the expansion of the Earned Income Tax Credit, have substantially increased incentives to work. The story that the government is to blame for unemployment is time-worn, and even less plausible today than ever, but that does not prevent it from rearing its head on Capitol Hill.

This little ideological tussle should probably be considered part of the political point scoring inherent in congressional hearings. The more substantive puzzle for the Fed is the fact that inflation has actually fallen a bit during the year to 1.4 percent, well below the Fed’s 2-percent target. Wages have also failed to increase much, with wage growth at just 2.5 percent.

Normally, if the economy was nearing its usual operating level, we would expect both inflation and wages to show signs of faster growth. Neither is happening. As usual, there are particular issues that make it difficult to figure out the signal in all the noise. Yellen referred to “a few unusual reductions in certain categories of prices." In the Fed’s view, inflation will rise once all of this clears out from the data.

Perhaps Yellen’s optimism was greeted so calmly by the committee because, in fact, the Fed’s interest rate increases have had little discernible impact on the economy. Interest rates on home mortgages did shoot up right after the elections last November, rising 0.8 percentage points, but they stabilized and actually dropped about 0.3 percent since then.

Freddie Mac’s index of average interest rates on 30-year mortgages went just below 4 percent in late May. The rate of 3.96 percent on July 6 is exactly the same as the rate on Dec. 24, 2015.

Furthermore, the Fed is not looking to cool off the economy; it is just looking to decrease and ultimately withdraw the stimulus it has been providing. In other words, it sees the economy as able to stand on its own feet again. In today’s world of political hyperbole, this seems a comforting bit of normality.

Finally, Yellen reiterated that the Fed is planning to decrease its holdings of U.S. government bonds by simply not reinvesting the money it receives when bonds mature. This process is expected to start later this year. Again, this is not a very drastic change. The Fed will not be selling its vast holdings on the open market.

Yellen clearly left all options open, stating the Fed could even return to purchasing bonds in a future situation where it felt that reducing the federal funds rate would not do enough to stimulate the economy.

It was something of a Goldilocks testimony, everything going according to plan, things returning to normal. Tune in later to see whether any of the big bad bears out in the woods break into the house.

Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.


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