Credit: Library of Congress
Janet Yellen, the newly inaugurated chair of the Federal Reserve, gave her first testimony before Congress, delivering the Fed’s semiannual Monetary Policy Report to Congress, also known as the Humphrey Hawkins testimony. Yellen, who became chairman earlier this month, largely echoed the sentiment of her predecessor, Ben Bernanke, defending the use of unconventional policy tools, such as forward guidance, and planning to maintain very low interest rates. Institutional investors around the globe, including sovereign wealth funds and pension CIOs listened intently on her words.
“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” Yellen said in her prepared remarks. “I served on the Federal Open Market Committee as we formulated our current policy strategy and I strongly support that strategy.”
Barring a “notable change” in economic data, Yellen said the Fed will continue tapering its monthly purchase of Treasuries and mortgage-backed securities. The process, known as quantitative easing (QE) implemented by the FOMC, was intended to lower long-term interest rates to stimulate spending in the domestic economy. Under Chairman Bernanke, the Fed scaled back monthly asset purchases to US$ 65 billion.
Although signs of slow job growth will not shake the Fed’s resolve to taper asset purchases, Yellen said the Fed will keep short-term interests rates at zero “well past” the time unemployment reaches 6.5%, which was the benchmark the Fed set for raising rates in 2012, when unemployment was at 8.1%, during its last round of stimulus.
This is approximately a 133% increase in the debt limit from May 2003.
Staying the Course
Yellen said she strongly supports the Fed’s dual mandate to promote employment and control inflation. Unemployment has dropped to 6.6%, but Yellen told the U.S. House of Representatives’ Financial Services Committee that the labor market recovery was “far from complete.” The Bureau of Labor Statistics reported only 113,000 new nonfarm positions added in January and 75,000 in December. In addition, the labor force participation rate plunged over the years – testing late 1970s levels.
Doing the Popular Thing
As many of her predecessors at the Fed have done, Yellen warned that the United States is on an unsustainable fiscal budget path. Rising deficits will crowd out private investment leading to higher interest rates and slower growth, she said. This is on the backstop of Congress agreeing to approve the U.S. debt limit through March 2015. The new U.S. debt ceiling is US$ 17.2 trillion which served as blow to pro-austerity politicians. Near the end of May 2003, Congress approved at debt limit of US$ 7.384 trillion. This is approximately a 133% increase in the debt limit from May 2003.
When pressed by Rep. Michele Bachmann (R-Minn.) to respond to former Congressman Ron Paul’s “Audit the Fed” proposal, Yellen said she strongly objected to “interfering with the independence of monetary policy, by bringing political pressures to bear on the committee’s judgment.” She noted that the Fed is already audited extensively and said she opposed the idea of Washington second guessing central bank decisions.