Fed’s Yellen Signals Policy Continuity; No Shift on Taper, Interest Rate Policies

February 11, 2014 05:18 AM
 

Yellen says employment situation still a watch point for the Fed.


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No shifts from the guidance on future tapering of the asset purchase program by the Fed and interest rate policy and a for great "continuity" in Fed policy moving ahead were the key points in testimony prepared for Fed Chairwoman Janet Yellen to deliver to the House Financial Services Committee today. Link.

"I expect a great deal of continuity in the FOMC's approach to monetary policy," Yellen stated. "I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability."

Turning to the specifics on monetary policy, Yellen noted, "If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective," Yellen's testimony said, "the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings." However, as was the case in the January post-FOMC meeting statement, "purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."

In addition, Yellen signaled no shift from the Fed's watchpoint on the unemployment rate at 6.5 percent relative to interest-rate policy. The Fed's current expectation is that "is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal."

Further, Yellen stated, "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."

As for the current economic situation, Yellen noted that around 1.25 million jobs have been added since the prior update to Congress in July and 3.25 million jobs have been added since Aug. 2012, a month before the Fed began their latest asset purchase effort. While the unemployment rate has fallen about 1.5 percentage points since the Fed's asset purchase effort started, Yellen cautioned, "recovery in the labor market is far from complete. The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment."

Specifically, Yellen noted that those out of work for more than six months still 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." Given those situations, Yellen said, the Fed must take more than the unemployment rate into account "when evaluating the condition of the US labor market."

Comments: Now the focus will shift to the true wildcard of the Humphrey-Hawkins testimony - questions from lawmakers. Those can provide the format for a host of responses from Yellen that could cover a lot of territory. She didn't waver in her confirmation hearing before the Senate Banking Committee last year so markets will watch to see if the newly installed Fed chair will remain as unflappable as she faces House Financial Services Committee members for the first time since taking the helm of the US Central Bank.

More Perspective on Yellen's Testimony

Yellen signals continuity

No surprises in Yellen testimony. Fed Chairwoman Janet Yellen didn't "commit news" in her prepared remarks for delivery to the House Financial Services Committee today.
"I expect a great deal of continuity in the FOMC's approach to monetary policy," Yellen stated. "I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability."

PERSPECTIVE: Had Yellen suddenly signaled a shift, that would have been a shocking development since she has been immersed in the Fed's current policy and has never signaled unease with the policies pursued at any stage so far. Her pledge of continuity, however, will be reassuring to markets except for those that were perhaps hoping she might break from the current policy path.

Her taper comments also reiterated current Fed policy, noting, "If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings."
But she also cautioned the process was not on a "preset course."

PERSPECTIVE: This testimony could have been lifted nearly verbatim from the post-meeting statement in January and again marks no shift from what the Fed has been saying since the prospect of tapering first appeared and the tapering effort began with the decision at the December meeting.

As for interest rate policy, Yellen reiterated the Fed's policy stance in January - that "it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal."

PERSPECTIVE: Again, no shift by Yellen from what the Fed has been saying. And she did not wade into the sticky issue of the past two Employment reports that have been disappointing to the market as they have been below expectations. She was not likely to go into that type of detail but the door could be opened to her views or the Fed's views on that matter in questions from lawmakers.

Essentially, her prepared remarks are probably a "post-January meeting press conference" opening statement of sorts. And like that session with the press, lawmaker questions as opposed to reporter questions will now follow. There are some on the House panel who have real heartburn with the asset purchase effort by the Fed so they may push Yellen to commit to accelerating the tapering efforts. But as she laid out in the economic outlook portion, the employment market has not improved to the degree the Fed would have liked so it's doubtful she will bite on any lawmaker push for a faster taper.

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