Yellen upbeat about growth in coming quarter
Federal Reserve Chairwoman Janet L. Yellen painted a mostly upbeat picture of the economy emerging from a weather-induced winter slowdown but gave no hints of when the central bank might start raising rock-bottom interest rates.
In Capitol Hill testimony Wednesday, Yellen confirmed that the Fed is on target to end its controversial bond-buying stimulus program this fall and defended the Fed’s easy money policies against criticism that they’ve helped Wall Street at the expense of average Americans.
Still, Yellen warned that the jobs situation was “far from satisfactory” and that a recent slowdown in the housing market was worrisome.
“While we have seen substantial improvements in labor market conditions and the overall economy since the financial crisis and severe recession, we recognize that more must be accomplished,” Yellen told the congressional Joint Economic Committee.
But she sounded no alarms about the anemic economic growth in the initial three months of the year. She attributed the weakness largely to temporary factors, such as the extreme weather that hit much of the country, and said the recovery should pick up through the rest of 2014.
“With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway, putting the overall economy on track for solid growth in the current quarter,” Yellen said.
The Labor Department said Friday that payrolls grew by a surprisingly strong 288,000 jobs in April and the unemployment rate dropped to 6.3%, the lowest level since September 2008.
The job growth was encouraging after the government reported last week that the economy barely grew in the first quarter, expanding at a 0.1% annual pace.
Last week, Fed policymakers continued to reduce the central bank’s bond-buying program, which was designed to push down mortgage and other long-term interest rates.
The reduction, to $45 billion a month, puts the Fed on pace to end the purchases by year’s end.
Attention has shifted to when the Fed might start to raise short-term interest rates, which it has held near zero since late 2008.
Rep. Kevin Brady (R-Texas), the committee’s chairman, said he was pleased that the Fed was ending its bond-buying effort. But he expressed concern that Fed policymakers have indicated they plan to keep short-term rates low long after the bond purchases end.
Yellen would not be pinned down on exactly when the Fed might start raising its benchmark short-term rate.
She was careful not to repeat her March comments that rate hikes could begin as soon as six months after the end of the bond-buying program. That estimate, at her first news conference after taking over as Fed chief, roiled financial markets.
Yellen told Brady on Wednesday that “there is no mechanical formula or timetable.”
Brady was frustrated, noting that when the latest round of bond-buying began in September 2012, Fed officials were targeting a reduction in the unemployment rate to 6.5%.
He complained the Fed continually has moved the goal posts on when it would start returning to more normal monetary policies. Low rates have hurt savers and pushed up stock prices as investors look for decent returns.
“It just strikes me, over time, this ‘Don’t worry, be happy’ monetary message isn’t working,” Brady said. “I believe we need more specifics and a timetable on the comprehensive exit strategy.”
Yellen said the Fed never indicated that a drop below 6.5% would trigger an interest rate rise. Also, she said the unemployment rate is not a perfect indicator of the jobs market, noting the high percentage of long-term jobless and people who are working part time because they can’t find full-time jobs.
“We need to develop a more nuanced approach to what’s going on in the labor market,” she said.
Some Republicans questioned her about an opinion column in Wednesday’s Wall Street Journal by Fed expert Allan H. Meltzer in which he asserted the central bank’s low-interest rate policies have been a factor in “goosing the stock market” to record highs at the risk of inflation.
Yellen did not agree.
“I would hardly endorse the term ‘goosing the stock market,’” she said.
Responding to criticism that the Fed’s policies have exacerbated income inequality by helping Wall Street, Yellen said she and her colleagues have been trying to stimulate economic growth. A growing economy helps all Americans, she said.
“There have been benefits … in the policies we’ve pursued for Main Street as well as for those who hold equities in their portfolios,” Yellen said.
She cited improvements in the housing market. The bond-buying efforts helped push mortgage rates to record lows, although the reduction in the stimulus program has led those rates to start rising.
Yellen said mortgage rates remained “quite low by historical standards,” making housing affordable.
But she said a recent slowdown in the housing market was a potential risk to the recovery, along with “heightened geopolitical tensions” — an apparent reference to the Ukraine crisis.
“One cautionary note … is that readings on housing activity — a sector that has been recovering since 2011 — have remained disappointing so far this year and will bear watching,” Yellen said.
