Yellen sticks to Fed's well-honed script, buoys markets

Posted on 02-21-2014 09:02
Summary: Janet Yellen’s suggestion that there will be little difference between her and her predecessor at the helm of the Federal Reserve may annoy some lawmakers, but it’s comforting global investors.

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Janet Yellen’s suggestion that there will be little difference between her and her predecessor at the helm of the Federal Reserve may annoy some lawmakers, but it’s comforting global investors.

U.S. stock markets rose Tuesday as Ms. Yellen made her first appearance on Capitol Hill as chair of the central bank, a marathon session that lasted more than five hours because she agreed to take questions from every member of the House Financial Services Committee that had one.

Ms. Yellen held up well under the unusually long grilling, deftly handling questions on the economy and monetary policy. She stumbled a bit when the discourse turned to the minutiae of financial regulation, and only once had to assure a congressman that she didn’t believe the Fed was “in any way corrupt.”

The length of the proceedings was perhaps the only big surprise. Her prepared statement promised a “great deal of continuity” with the policies developed by Ben Bernanke, who retired at the end of January.

Ms. Yellen played down disappointing hiring data, and said it would take a “notable” change in the economic outlook to persuade the Fed to alter its plan to slowly wind down its monthly purchases of financial assets.

On other days, news of the Fed’s intention to reduce its asset-purchase program, called quantitative easing, or QE, has roiled financial markets. On Tuesday, they rose sharply. The Standard & Poor’s 500 Index, the broadest measure of U.S. equity prices, and the Dow Jones industrial average both climbed by more than 1 per cent.

“In short, the Fed’s dovish bias will continue,” said Adrian Miller, director of fixed-income strategy at GMP Securities in New York, invoking Wall Street’s term for an inclination toward stoking economic growth.

The closest Ms. Yellen came to being controversial was her dismissal of recent volatility in global financial markets, some of which is attributable to the Fed’s decision in December to curb its monthly bond purchases, which it makes with newly created money.

Global investors now are rethinking their strategies as the promise of higher interest rates in the United States make the world’s largest economy an increasingly attractive place to put money. Some emerging-market countries have been hit especially hard, prompting officials in countries such as India to lash out at the Fed.

Ms. Yellen’s response Tuesday was that the Fed simply is doing its job.

“Our sense is that at this stage these developments do not pose a substantial risk to the U.S. outlook. We will, of course, continue to monitor the situation,” Ms. Yellen said.

Later, she added that, “we’ve been very clear from the outset that we initiated our asset-purchase program and accommodative policy more generally to pursue the goals that Congress has assigned to the Federal Reserve, namely supporting economic growth and employment in a context of price stability.”

In response to a question, Ms. Yellen conceded that the she was “surprised” that hiring slowed in December and January, but she cautioned against jumping to conclusions because unusually frigid and snowy weather may have temporarily chilled the recovery.

That’s not to say Ms. Yellen is satisfied with the state of the economy, and she reinforced that the Fed will be watching more than the unemployment rate to gauge the economy’s health.

While the growth of non-farm payrolls slowed in December and January, the jobless rate continued to fall and now sits at 6.6 per cent. However, Ms. Yellen noted that an “unusually large” fraction of the unemployed are people who have been without work for six months or longer, and that the percentage of part-time workers who say they would prefer to have a full-time job is “very high.”

Those points are important because the Fed’s current guidance is that it will consider raising its benchmark interest rate from zero once the unemployment rate is “well past” 6.5 per cent. The fact that it is already is at 6.6 per cent has prompted some Fed watchers to express confusion about when the central bank will adjust borrowing costs.

The “recovery in the labour market is far from complete,” Ms. Yellen said. The high rates of long-term unemployment and dissatisfied part-time workers “underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labour market.”

KEVIN CARMICHAEL

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