WASHINGTON, Feb 27 (Reuters) - The following are highlights of Federal Reserve Chair Janet Yellen’s testimony on the U.S. economy and monetary policy to the Senate Banking Committee on Thursday.
Yellen delivered the Fed’s semi-annual Monetary Policy Report to the House Financial Services Committee on Feb. 11, but her testimony to the Senate panel scheduled for Feb. 13 was delayed because of a winter storm.
YELLEN ON OVERNIGHT FIXED-RATE REVERSE REPURCHASE AGREEMENT OPERATION
“We are engaging in this program, you mentioned this is something technical, but we want to be able to firmly control our short-term money market rates ... When the time ultimately comes, which is probably a long way off, we do want to tighten monetary policy and raise our target for short-term interest rates. We would like to be able to execute that in a very smooth way so that we have good control over the level of short-term interest rates.”
“There are many different views on our committee about what the right way is to cast forward guidance ... The unemployment rate is not a sufficient statistic for the state of the labor market. There is no hard-and-fast rule about what unemployment rate constitutes full employment and we need to consider a broad range of indicators. Many members of the committee have emphasized this point and it’s one I agree with. It moves in the direction of qualitative guidance. On the other hand, we do want to give markets as much of an indication of how we expect to conduct policy as we can.”
”I think that lowering that rate would have very limited. It goes in the right direction, but would have a very limited effect on bank lending.
“We have worried about what impact it would have on money markets that we operate in, and not wanting to completely disrupt money market activities ... It’s something that we have considered and could consider going forward, but there are conflicting things that are going on there.”
“We will, in all of our rule makings, do our best to minimize the burden on community banks and will listen very carefully through our contacts at community banks to understand what the burdens are and to minimize them where we can.”
“I think it’s important to understand this is ... taking place entirely outside the banking industry and to the best of my knowledge there is no intersection at all in any way between bitcoin and banks the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have the authority to supervise or regulate bitcoin in any way.”
YELLEN ON CONCERNS EASY MONEY POLICY CAUSED MARKET EXCESSES
”We are watching very carefully for the development of any such excesses. We are very focused on not allowing such a thing to happen again ... While there might be a few areas where I have concerns, such as deteriorating underwriting standards in leveraged lending, farmland prices, a few things, I don’t see those excesses having developed at this point.
“With respect to housing prices, they have rebounded significantly, but remain not back to their peak levels by any means. And price-rent ratios in housing certainly remain in normal ranges. So I don’t think we have promoted excesses, certainly not at this stage.”
“There’s considerable debate about just what the employment impact of this would be. CBO (Congressional Budget Office) is qualified as anyone to evaluate that literature and I wouldn’t want to argue with their assessment. I mean, there are a range of studies and they cited them, but I wouldn’t want to argue with (them). They’re good at this kind of evaluation ... I think they also ... indicated that a large number of individuals would see their incomes raised as a consequence.”
”This is high on our regulatory agenda with this coming year. We have out an initial proposal on this. I can’t give you an exact time. We will certainly be working with the other agencies to finalize it.
“Several years, I think.”
“To me it is the state of the job market in which people are able to find, in a reasonable period of time, jobs for which they are qualified and there is no single metric that would enable me to tell you when we will reach that.”
YELLEN ON REGULATIONS FOR ‘TOO-BIG-TO-FAIL’ FIRMS
”I‘m slightly surprised that he (Fed Board Governor Daniel Tarullo) said we are ‘nowhere close’ (on resolving too-big-to-fail) because I personally think we’ve made quite a lot of progress in putting in place regulations that will make a huge differences to this....
“I agree that an environment of low rates ... and we have had a long period of low interest rates ... can give rise to behavior that poses threats to financial stability and therefore we need to be looking at that very carefully and we are doing so in a very thorough way, I believe.”
YELLEN ON MONITORING ASSET PRICES, LEVERAGE AND CREDIT GROWTH
“There are a number of things that we are monitoring: measures of asset prices and whether or not they appear to be diverging from historical norms ... We’re looking at leverage which builds up and leverage can be very dangerous to the financial system ... We’re looking at credit growth to see whether or not that has potential worrisome trends ... In addition to that, we’re looking particularly to our stress tests at financial institutions. In a low-interest rate environment we have to worry about whether or not they’re appropriately dealing with interest rate risk.”
YELLEN ON UNDERWRITING STANDARDS, LEVERAGED LENDING, OTHER CONCERNS
“I would say at this stage I don’t see concerns but there are pockets of a few things that we’ve identified that do concern us. For example, underwriting standards and leveraged lending clearly appear to be deteriorating. We have addressed that with supervisory guidance and special exams and will continue to be very vigilant in that area ... There are a few areas within asset price valuations, broadly speaking. I wouldn’t worry but there are a few areas where I would be concerned. Many people have emphasized farmland as a concern, farmland prices.”
“Asset purchases are not on a preset course. If there is a significant change in the outlook, certainly we would be open to reconsidering, but I wouldn’t want to jump to conclusions here.”
YELLEN ON FED‘S 6.5 PERCENT JOBLESS RATE THRESHOLD
“Six-and-a-half percent unemployment is not the (policy-setting) committee’s definition of what constitutes full employment. The range of views on that among committee members is substantially lower ... The unemployment rate is not a sufficient statistic to measure the health of the labor market. An additional 5 percent, an unusually high fraction of our labor force, is working part time for economic reasons ... and we have an unusually high fraction of Americans who are unemployed and have been for substantial amounts of times. So, as we go to fuller consideration how is the labor market performing, we need to take all of those things into account.”
“I strongly support, and would urge the Congress to address the issue of GSE (government sponsored enterprise) reform. We’ve gotten a mortgage system that in a way remains very highly dependent on government backing and it fails to meet the very important objective of successful securitization without systemic risk.”
“Fiscal policy really has been quite tight and has imposed a substantial drag on spending in the U.S. economy over the last several years ... The drag is likely to lessen substantially during the current year, but nevertheless there remains some drag. Of course it is true that because there has been fiscal policy drag the burden on monetary policy has been larger.”
“I do think the economy is beginning to recover and we have made progress. And in the minimum, I would hope fiscal policy would do no harm.”
“We see accommodative monetary policy as remaining appropriate for quite some time. There’s no conflict at all at the moment between the two goals the Congress has assigned to us of promoting maximum employment and price stability.”
“We are looking very carefully to design an appropriate set of rules for companies with important involvement in insurance to recognize that there are very significant differences between the business models of insurance companies and the banks that supervise and we are taking the time that is necessary to understand those differences and to attempt to craft a set of capital and liquidity requirements that will be appropriate to the business models of insurance companies.”
“Since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts have expected. Part of that softness may reflect adverse weather conditions, but at this point it’s difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”