Unfazed by the recent global turmoil, Federal Reserve Chairwoman Janet L. Yellen offered an optimistic outlook for the U.S. economy, including workers' wages, and reaffirmed that the central bank is likely to begin raising interest rates later this year.
During a three-hour congressional hearing Wednesday that at times became confrontational, Yellen pushed back against lawmakers calling for stronger oversight of the Fed.
House Republicans in particular have been increasingly critical of the Fed's monetary policymaking and regulatory activities, and have pressed for greater transparency and accountability.
While defending the Fed's independence, Yellen's comments on the economy made clear that despite the problems in Greece and China, she saw the U.S. economy strengthening in the second half of the year.
She said there are still too many unemployed people not searching for work, and she cited weakness in U.S. business investments and exports. But the Fed leader said that some of those head winds were fading and that low oil prices and continuing job gains should help maintain momentum in consumer spending, which accounts for two-thirds of the nation's gross domestic product, or total economic output.
“Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” Yellen told the House Financial Services Committee on the first of two days of her semiannual testimony to Congress.
She also gave an encouraging forecast of workers' pay, which on average has barely grown during the last six years of the recovery.
“As the economy improves and the labor market gets stronger, I would expect to see the growth of wages pick up over time,” Yellen said, “and at this point, I think we're seeing at least some first tentative signs that wage growth is increasing.”
The Fed's “beige book” of regional economic conditions, released Wednesday, suggests that wage gains remain concentrated in certain occupations. Most of the central bank's 12 districts nationwide showed “only modest wage pressures aside from positions that required specialized skills or were in high-demand,” said the report, which is based on a survey of business leaders during June and early July.
The Fed also is closely watching measures of inflation, which have been running unusually low — a sign of weakness that could undermine hiring and wage increases. But Yellen said she considers the recent low readings as transitory, reflecting the fall in the price of oil and imported goods. She reiterated her expectations that inflation would gradually rise toward the Fed's target of 2%.
As long as the economy continues to progress along those expectations, Yellen said, the Fed is on track this year to raise its benchmark short-term interest rate, which has been near zero since the depths of the Great Recession in late 2008. In June, 15 of 17 Fed policymakers polled said they were looking for a rate hike this year.
John C. Williams, president of the Federal Reserve Bank of San Francisco and a voting member of the Fed's policymaking committee, sounded even more enthusiastic about the economy.
“I see growth on a solid trajectory, full employment just in front of us, wages on the rise and inflation gradually moving back up to meet our goal,” he said Wednesday at a meeting of the Chamber of Commerce in Mesa, Ariz.
In her testimony Yellen repeated, as she has many times before, that the importance of the first rate hike in nearly a decade should not be overemphasized.
Although markets have been consumed by when that initial move might come — many expect it in September or December — Yellen said that “what matters for financial conditions and the broader economy is the entire expected path of interest rates,” which she has stated is likely to show gradual increases reflecting the expected moderate pace of economic growth.
Yellen concluded prepared remarks with examples of the Fed's efforts over the years to be more transparent about its operations and decision-making, including providing minutes of meetings and holding regular news conferences. Her comments anticipated the sharp questions she would face from some House lawmakers who have clashed with Yellen in recent weeks.
In one particularly testy exchange Wednesday, Rep. Sean P. Duffy (R-Wis.) demanded to know what basis Yellen had for not turning over documents to Congress related to a possible leak of confidential bond-buying information in 2012.
Yellen responded that the bank did not want to compromise an open criminal investigation. But, cutting her off, Duffy shot back that the Fed had deviated from its own guidelines in the way it handled the breach. “It appears that you are the one who is jeopardizing, or the Fed is the one who is jeopardizing, this investigation. Am I wrong?”
Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said, “One way that our economy can be healthier is for our Federal Reserve to be more predictable in the conduct of monetary policy.”
During periods of expanded economic growth, such as 1987 to 2003, he said, “the Fed followed a more clearly communicated and understandable and predictable conventional rule. America prospered.”
“Today we're left with so-called forward guidance, which unfortunately remains somewhat amorphous, opaque and improvisational,” Hensarling said, referring to the Fed's guiding statement about its interest rate decision.
Yellen argued that adopting a rules-based formula, especially one based on economic output and inflation, as some have suggested, would tie the Fed's hands in steering the economy effectively.
“I think we need a systematic policy, but I would strongly resist agreeing to follow any rule where the stance of monetary policy depends on only the current readings of two economic variables, which is what your reference rule relies on,” she said.
Like her predecessor, Ben S. Bernanke, Yellen has vigorously opposed efforts to subject the central bank to a so-called audit of its policymaking, which she and others have argued would politicize the independent institution.
“The Federal Reserve ranks among the most transparent central banks,” she said. “Efforts to further increase transparency, no matter how well intentioned, must avoid unintended consequences that could undermine the Federal Reserve's ability to make policy in the long-run interest of American families and businesses.”
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