Yellen Says Weak Job Market Shows U.S. Still Needs Stimulus
Federal Reserve Chair Janet Yellen told lawmakers the central bank must press on with record monetary stimulus to combat persistent job-market weakness.
“There are mixed signals concerning the economy,” Yellen said in response to questions during testimony to the Senate Banking Committee today. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates.”
While her “overall view is more positive,” Yellen said low wages are one sign of “significant slack” in labor markets, even after the jobless rate fell to an almost six-year low. In unusually emotive language for a central banker, she talked about the “psychological trauma” suffered by the unemployed and their families.
“She is a determined dove,” David M. Jones, president of Denver-based economic consulting firm DMJ Advisors LLC and a former Fed economist who has written four books on the central bank, said today in a Bloomberg Radio interview. “She’s more worried about improving labor-market conditions, the long-term unemployed, flat wages, and other kinds of indications that there’s still considerable slack in the labor market. In her heart, that drives her decision.”
In prepared testimony, Yellen repeated that interest rates are likely to stay low for a “considerable period” after the Fed ends its asset-purchase program, which she said could happen following the October meeting.
“A high degree of monetary policy accommodation remains appropriate,” Yellen said in her semi-annual testimony. “Although the economy continues to improve, the recovery is not yet complete.”
The Standard & Poor’s 500 Index fell as much as 0.6 percent as the Fed’s Monetary Policy Report said valuations for smaller companies in social-media and biotech industries appear “substantially stretched.” The index closed down 0.2 percent at 1,973.28 in New York. The yield on the 10-year Treasury note was little changed at 2.55 percent.
For an hour and 40 minutes, Yellen responded to senators’ questions on subjects ranging from bank oversight and asset-price bubbles to the housing market and the Fed’s bond-buying program, known as quantitative easing.
Sherrod Brown, an Ohio Democrat who has proposed legislation to shrink the biggest U.S. banks, asked about the human cost of unemployment.
“It takes such a toll on families and children,” Yellen said. “Anyone who ever talked to people experiencing significant unemployment realizes what the psychological toll is and the ways it affects their well-being and that of their community.”
David Vitter, a Louisiana Republican, asked for her views on his proposed law to mandate that at least one of the seven Fed board members have community bank experience. Yellen said while having a community banker on the board would be “very positive,” she doesn’t support doing so with legislation.
Asked by Pennsylvania Republican Patrick Toomey about a proposal that the Fed describe a rule or strategy for adjusting interest rates, she said it “would be a terrible mistake” because the Fed needs to retain flexibility.
“If we were following a specific mathematical rule, I really think performance in this recovery would have been dreadful,” she said.
While unemployment fell to 6.1 percent last month, some of the labor-market gauges watched by Yellen show continued weakness. The participation rate, which measures the share of working-age people in the labor force, was 62.8 percent last month, matching the lowest level since 1978. Among the unemployed, about a third have been out of work for six months or longer.
Even before the latest jobs report, Federal Open Market Committee participants raised their projections for the main interest rate over the next two years, while continuing to predict that the first increase would occur next year.
Their median estimates, released last month, called for a rise to 1.13 percent at the end of 2015 and 2.5 percent a year later. They estimated in March the rate would rise to 1 percent by the end of next year and 2.25 percent at the end of 2016.
Economists are predicting growth will snap back from a first-quarter contraction as an improving job outlook and stock-market gains boost consumer confidence and spending.
Gross domestic product will expand 3.1 percent from July through December following a 3.3 percent advance last quarter, according to the median forecast of 74 economists polled by Bloomberg from July 3 through July 9. It would be the first time since 2004-2005 that GDP has sustained such gains over an extended period.
“Economic activity will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth,” Yellen said.
A pickup in inflation toward the central bank’s 2 percent objective has also prompted some officials to say the Fed may have to consider tightening sooner. The Fed’s preferred gauge, the personal consumption expenditures index, rose 1.8 percent from a year earlier in May, the most in 19 months.
“Inflation has moved up in recent months but remains below the FOMC’s 2 percent objective for inflation over the longer run,” Yellen said.
Policy makers, who have kept the benchmark interest rate near zero since December 2008 and ballooned the central bank balance sheet to a record $4.38 trillion, are beginning to plan how they will wind down their unprecedented stimulus.
The subdued expansion may warrant keeping rates low for some time even after employment and inflation are back to normal levels, Yellen said, while repeating her warning last month that the economic outlook is uncertain and rates also may need to be raised sooner.
Last month, officials continued cutting the monthly pace of asset purchases for a fifth straight meeting, with a reduction of $10 billion, to $35 billion.
Officials also agreed they must monitor markets for signs of froth and use supervisory measures if necessary to “address excessive risk-taking and associated financial imbalances.”
Yellen said real estate, equity, and corporate-bond valuations “remain generally in line with historical norms,” while flagging lower-rated corporate debt as a market where “valuations appear stretched.”
“We are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance,” she said.
In the monetary policy report accompanying her testimony, Fed officials said since issuing supervisory guidance on leveraged lending practices last year, “there has been strong supervisory follow-up to ensure compliance.”
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