Janet Yellen, fresh from taking the helm of the US Federal Reserve, made it clear on Tuesday that she would not make any abrupt changes to US monetary policy, saying the central bank was on track to keep reducing its stimulus even though the labor market recovery was far from complete.
In her first public comments since becoming Fed chief earlier this month, Yellen had testy exchanges with some Republican lawmakers over Wall Street regulation and central bank independence. She managed to keep financial markets calm by emphasizing continuity with the policy approach taken by her predecessor, Ben Bernanke.
Yellen said the central bank must keep its eye on the “unusually high” incidence of long-term unemployment and the “exceptionally high” proportion of Americans who can find only part-time work as it plots a tricky reversal of its very accommodative policy stance.
“By a number of measures our economy is not back, the labor market is not back to normal,” Yellen told the US House of Representatives’ Financial Services Committee. “There’s a great deal of slack in the labor market still.”
Under Bernanke, the Fed bought trillions of dollars in bonds to drive borrowing costs lower and spur investment and hiring, swelling its balance sheet to more than US$4 trillion. In December, it decided to begin scaling back its support given a drop in unemployment and stronger economic growth.
However, since then signs have emerged of a sharp slowdown in jobs growth, leading some investors to wonder whether the Fed might put the wind-down of its bond-buying program on hold.
Yellen showed little inclination to change tack. She said the Fed would likely take “further measured steps” to curb its stimulus if data broadly supports policymakers’ expectation of improved labor markets and a rise in inflation, and she cautioned against reading too much into recent jobs figures.
The Fed has trimmed its monthly asset purchases by US$10 billion at each of its last two policy meetings. It now buys US$65 billion in US Treasuries and mortgage bonds per month and it expects to shutter the program this year.
Yellen said the purchases were not on a pre-set course, but added that it would take “a notable change in the outlook” for Fed policymakers, who next meet on March 18 and March 19, to set aside their plan to wind down the program.
More than five years after the 2007 to 2009 recession ended, the Fed has embarked on perhaps its most difficult policy shift as it tries to back away from flooding the financial system with ultra-easy money while convincing investors that interest rates will stay near zero well into next year.
Having lowered rates to near zero in the depths of the crisis in late 2008, the Fed has said it does not expect to raise them until well after the time the jobless rate drops below 6.5 percent, especially if inflation remains weak.
Unemployment has already reached 6.6 percent, down from 8.1 percent when the Fed launched the latest bond-buying program in 2012, and policymakers are scrambling to decide how best to adjust their guidance.