Yellen stays the course on stimulus exit

The Federal Reserve would need to see a “notable change” in the labor market to consider pausing its withdrawal of stimulus, Janet Yellen told Congress on Tuesday.
 

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Testifying for the first time since being sworn in as head of the central bank, Yellen admitted she was “surprised” by the two recent job reports that showed hiring growth well below economists' expectations.
 
But she stopped short of suggesting that the reports might cause the Fed to alter its planned “tapering” of bond purchases.
 
“We have to be very careful not to jump to conclusions,” she warned the House Financial Services Committee. “What would cause the committee to consider a pause is a notable change in the outlook.”
 
Yellen is stepping into the Fed’s top job at a critical time. Stocks in emerging markets have taken a beating recently, partly due to fears about how the Fed’s drawdown of its multibillion-dollar bond purchases will affect the global economy.
 
While Yellen is a new face atop the central bank, the longtime Fed official told lawmakers not to expect huge changes now that Ben Bernanke has left office.
 
The new chairwoman predicted a “great deal of continuity” at the Fed under her leadership. She noted that she was Fed vice chairwoman when the bank first embarked on its unprecedented rounds of stimulus, and said she will continue to back that approach.
 
Still, Yellen said that while the economy gained steam at the end of 2013, recovery in the jobs market is “far from complete.” And while unemployment is falling, Yellen highlighted other challenges for the unemployed.
 
“Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high,” she said in her opening testimony. “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”
 
Yellen’s latter point is particularly significant, as the unemployment rate, now at 6.6 percent, is near the 6.5 percent threshold the Fed once identified as the level that would need to be reached before officials would consider raising rates.
 
The Fed just recently began slowing down years’ worth of stimulus in the economy, and has months to go before it expects to completely end its monthly bond purchases. As such, few are expecting the Fed to be boosting rates any time soon.
 
Yellen emphasized that the economy is facing “extremely unusual” conditions, and downplayed the significance of the Fed threshold.
 
“When this economy has severe headwinds from the financial crisis ... we need to follow a different approach,” she said.
 
Yellen sought to portray herself as a continuation of the Bernanke era, facing criticism from Republicans who weren’t wild about the actions of her predecessor.
 
Republicans argued the Fed’s easy-money policies have punished savers with paltry interest income while enabling Washington profligacy by lowering the government’s borrowing costs.
 
They have also challenged the Fed’s efforts to implement portions of the Dodd-Frank financial reform law.
 
Like Bernanke before her, Yellen sought to steer clear of getting drawn into partisan congressional fights about the proper prescription for the economy. She dodged efforts from Democrats trying to get her to endorse further government investment instead of harsh cuts, while doing the same for Republicans who pushed her to sound the alarm on long-term deficits.

Lawmakers in both parties, however, took time to congratulate Yellen on her historic appointment as the first female head of the Fed, an institution that is entering its 100th year.

The one area where Yellen took a stand was on the growing bipartisan effort to subject the Fed’s monetary policy deliberations to full congressional review. The “audit the Fed” movement has gained ground in recent years, and the House passed legislation in the last Congress subjecting all the Fed’s operations to government review.

Like Bernanke before her, Yellen hotly contested such a legislative move, saying it would stifle debate among Fed experts and expose the independent institution to political pressure.

“What I don’t agree with and would strongly oppose is interfering with the independence of monetary policy by bringing political pressures to bear on the committee’s judgment about what is the appropriate way to implement monetary policy,” she said.

She noted that most of the Fed’s operations are already subject to outside review, with only its monetary policy decisions completely free of outside scrutiny.

— This story was last updated at 4:04 p.m.