Tags: taper | Yellen | Fed | Clinton

Yellen Pledges Continuity With Gradual Tapering of Bond Buying

Tuesday, 11 February 2014 01:24 PM

Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled that the bar is high for a change in that plan.

Only a “notable change in the outlook” for the economy would prompt policymakers to slow the pace of tapering, Yellen said in response to a question today during testimony to the House Financial Services Committee. “It’s important for us to take our time to assess” the significance of recent reports showing payrolls expanded less than projected, she said.

Yellen, delivering her first public remarks as Fed chairman, said financial-market turmoil doesn’t pose a major risk to the outlook for the U.S. economy and repeated the Fed’s statement that asset purchases aren’t on a “pre-set course.”

While growth has picked up, “the recovery in the labor market is far from complete,” Yellen said earlier in prepared remarks. “I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level.”

Stocks climbed and Treasuries fell. The Standard & Poor’s 500 Index rose 0.8 percent to 1,814.38 at 12:01 p.m. in New York. The yield on the 10-year note rose five basis points, or 0.05 percentage point, to 2.72 percent.

“Her message was continuity of policy and, matching that with continuity of outlook, suggests they remain on the same course,” said Keith Hembre, a former Minneapolis Fed researcher who helps oversee $125 billion as chief economist at Nuveen Asset Management LLC in Minneapolis.

Jobless Rate

The Fed chairman spoke days after a government report showed the jobless rate unexpectedly declined almost to the Fed’s threshold for considering an increase in the benchmark interest rate, even as payrolls growth cooled.

Yellen said the unemployment rate alone isn’t an adequate gauge of labor-market health.

Policymakers, who will see another jobs report before they next meet in March, “would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor market performance.”

Yellen also said that the Fed has been “watching closely” volatility in global financial markets and that “our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”

Praises Bernanke

Yellen, 67, used her testimony to praise her predecessor, Ben S. Bernanke, for helping “make our economy and financial system stronger” and said she’d continue his strategy.

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” Yellen said. She said she served on the Federal Open Market Committee “as we formulated our current policy strategy and I strongly support that strategy.”

The Fed said in December that it would start reducing the monthly pace of asset purchases, citing progress toward its goal of full employment. It announced a $10 billion reduction that month, followed by a cut of the same size in January, to $65 billion.

The central bank has said it will keep buying bonds until the outlook for the labor market has “improved substantially.”

Fed policymakers have also sought to reassure investors that while they are tapering bond purchases, they still intend to hold the Fed’s target rate near a record low.

‘Well Past’

Beginning in December 2012, the FOMC said it would keep the rate near zero “at least as long” as unemployment was above 6.5 percent. At their December 2013 meeting, it strengthened that statement, saying the rate is likely to stay near zero until “well past the time” unemployment falls below 6.5 percent, a strategy Yellen repeated today.

Unemployment in January fell to 6.6 percent, the lowest since October 2008, from 6.7 percent, a Labor Department report showed last week. Job growth in December and January was the weakest of any two-month period in the past three years.

Joblessness has fallen faster than policymakers expected. When they first announced the threshold, most of them expected a rate of 7.4 percent to 7.7 percent at the end of 2013 and 6.8 percent to 7.3 percent at the end of this year.

“They thought if the rate fell to this level you’d be seeing a lot more job growth and economic growth,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed economist. “The Fed is viewing the totality of data as suggesting the labor market is not as healthy as they thought it would be when we got to that 6.5 percent threshold.”

Next Meeting

The FOMC doesn’t meet again until March 18-19. By then, it will have an additional month of economic data, including the jobs report for February.

Yellen took over as Fed chairman on Feb. 3 after serving for three years as Bernanke’s deputy. She has supported the bond purchases that expanded the Fed’s balance sheet to a record $4.1 trillion, and she helped craft a communications strategy designed to shape expectations for the future path of interest rates.

Bernanke said in a press conference in December that he had “always consulted closely with Janet, even well before she was named by the president.” He said she “fully supports” the central bank’s decision to cut asset purchases.

While she was vice chairman, Yellen also led a communications subcommittee that formalized the Fed’s goals for inflation and unemployment. The Fed now aims for inflation of 2 percent over the longer run. It has been undershooting that goal: the Fed’s preferred gauge of consumer prices climbed 1.1 percent last year.

Detailed Comments

Yellen hasn’t given detailed comments on the outlook for monetary policy and the economy since April, aside from her confirmation hearing in November. Outside of the confirmation process, Yellen hasn’t testified before Congress as a central bank official since July 1996, when she was a Fed governor appointed by President Bill Clinton.

The Fed has held its target interest rate near zero since December 2008 and engaged in three rounds of bond buying. The easing policies helped push the S&P 500 up as much as 173 percent from a 12-year low in 2009.

The index is down about 2 percent this year, driven lower by turmoil in emerging markets and speculation about the direction of Fed policy. The MSCI Emerging Markets Index has lost 6.7 percent this year through yesterday.

Led by Reserve Bank of India Governor Raghuram Rajan, policymakers in emerging markets have complained that the Fed and other major central banks are fanning turmoil by failing to account for the impact of their policies on other countries.

More Volatile

The Board of Governor’s Monetary Policy Report included a report on emerging markets that have turned more volatile in response to the Fed’s tapering of quantitative easing and local events. The Fed Board’s analysis said there were signs that investors were distinguishing between the economies.

“Investors appear to have been differentiating among” emerging market economies “based on their economic vulnerabilities,” according to a Monetary Policy Report presented to the House committee.

The Fed report included a vulnerability index, and said “Brazil, India, Indonesia, South Africa, and Turkey are among the economies that appear to have been the most affected” by the sell-off.

Still, thanks to policy improvements following the crises of the 1990s, such as more flexible exchange rates and lower inflation, “the degree of vulnerability across economies appears to be materially lower compared with past episodes.”

Growth Pickup

While recent gauges of U.S. manufacturing and the labor market have shown weakness, economists forecast a pickup in growth this year. Gross domestic product is likely to expand 2.8 percent, according to the median forecast of economists surveyed by Bloomberg, following growth of 1.9 percent in 2013.

Visa Inc., American Express Co., Discover Financial Services and MasterCard Inc. all reported improved profits going into 2014 as customers used credit and debit cards to make purchases.

The economy is showing momentum, MasterCard Chief Executive Officer Ajay Banga said on a Jan. 31 earnings call. “I don’t see the U.S. as being slowing in any way,” Banga said. “I see it improving.”

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Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor's policies by scaling back stimulus in "measured steps" and signaled that the bar is high for a change in that plan.
Tuesday, 11 February 2014 01:24 PM
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