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On Tuesday morning, Federal Reserve Chair Janet Yellen spoke before the House of Representatives in the semiannual Monetary Policy Report. These are her first public comments since assuming the role as head of the U.S. central bank from her predecessor Ben Bernanke on Feb. 3, 2014.
Yellen, who until last week served as Vice Chair of the Fed, testified on the health of the U.S. economy, her commitment to the central bank’s ongoing stimulus efforts, and regulatory needs for the financial system. Below are the critical highlights of her testimony, released this morning at 8:30 a.m.
- On Unemployment: Yellen said that the unemployment rate is still higher than the Fed sees as a level “consistent with maximum sustainable employment.” Yellen cited long-term unemployment (those out of work beyond six months) as an “unusually large fraction of the unemployed.” She cited the importance of maintaining Fed policies in order to lower the unemployment rate and improve the overall labor market through the balance of the year.
- On Economic Growth: Yellen said the Fed expects economic growth and employment to “expand at a moderate pace” in 2014 and 2015, with the unemployment rate moving back to a “sustainable level.” She predicts that inflation will tick back toward 2% in the next few years. She pledged to monitor the recent volatility in the global markets; however, she does not anticipate it would impose a “substantial risk” to the U.S. economy. This suggests that recent issues in the emerging markets will not affect the Fed’s policies moving forward.
- The Taper is Data Dependent: Yellen reinforced the Fed’s goal to end the bond-purchasing program over 2014. The Fed chair said that as “incoming information” supports the Fed’s goals of reducing unemployment and moving inflation toward the target, the Fed Committee will continue to taper QE3. However, Yellen stated that “purchases are not on a preset course” and that ongoing cuts to the program rely on labor market conditions, inflation, and other indicators “like efficacy and costs of such purchases.”
- Praise for Her Predecessor: Yellen began her testimony by acknowledging former Fed Chair Ben Bernanke’s “contributions” and cited his work for making the “financial system stronger” and the Federal Reserve more “transparent and accountable.” She pledged to continue working toward those principles and said she expects “a great amount of continuity” with her predecessor’s policies.
- Regulatory Challenges Lie Ahead: Yellen concluded her prepared statement by highlighting the regulatory challenges the nation continues to face in the wake of the financial crisis. Citing progress the Fed and other agencies have made in establishing the Volcker Rule, Yellen emphasized much needed changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act and improving leverage-ratio standards. The next found of annual capital stress tests of the nation’s 30 largest bank holding companies has begun, and the government expects to receive results in March.
What Comes Next?
The most important statement in this testimony is the statement that the tapering effort of the stimulus is reliant on “incoming information,” meaning economic data tied to the U.S. economy. The Fed is taking a reactive approach to the data rather than a proactive stance.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said last month that recent economic data does not justify a taper. Keith predicts that Yellen and the Fed could change course in the coming months.
“We will see Yellen re-engage the printing presses, even if she calls the ‘innovative’ market actions she’s supported something other than stimulus later this year,” said Fitz-Gerald.
One of the biggest reasons that the Fed could reverse its taper decision centers on employment.
On Friday, the U.S. economy did not meet expectations of job growth, creating just 113,000 jobs compared to economist forecasts of 185,000. [And the January jobs report was even worse than it looks…]
The Fed’s responsibility is its policies’ impact on domestic unemployment levels and inflation. A string of worsening jobs reports would give Yellen reason to engage in some kind of “stimulus.”
For that reason, all eyes are now on the Labor Department’s March jobs report.
Check back to Money Morning for more coverage of Yellen’s ongoing testimony before Congress.
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