WASHINGTON May 7 The following are highlights
of Federal Reserve Chair Janet Yellen's testimony on the U.S.
economic outlook to the congressional Joint Economic Committee
ON ENDING QE
"As long as we continue to see improvement in the labor
market and we believe the outlook is for continued progress, and
as long as we continue to believe and see evidence that
inflation will move back up over time to our 2 percent
longer-run objective, we anticipate continuing to reduce the
pace of our asset purchases in measured steps."
"If something were to change notably about the outlook we
would reconsider that plan."
ON INTEREST RATES
"When we complete the asset purchase program the committee
has indicated that it expects a considerable time before we
begin to normalize policy in the sense of beginning to raise our
target for short term interest rates."
"There is no mechanical formula or timetable for when that
will occur ... The (FOMC) committee has simply said a
considerable time, without mechanically stating what that time
interval is ..."
"You can see that most (FOMC) members believe that in 2015
or 2016 normalization would begin under their baseline outlook."
ON SHRINKING BALANCE SHEET
"I can't give you a number that would be an appropriate
size. The committee anticipates that our balance sheet over time
will move down to substantially lower levels than it is now.
Whether or not it will ultimately return to pre-crisis levels
... or remain somewhat larger is something that we will
determine as we gain experience with exit."
ON SALES OF MORTGAGE-BACKED SECURITIES
"We have indicated that we do not intend to sell
mortgage-backed securities from our portfolio, except perhaps
when the holdings are very small, to eliminate some residual
holdings. Eventually, and the committee hasn't decided on the
timing of this, we are likely to cease reinvestment of
principal, and at that point our holdings of mortgage-backed
securities would begin to decline over time as principal
matures. And so, it would take a period of some years for our
holding to diminish."
ON LONG-TERM UNEMPLOYMENT
"I have very little doubt that if growth in the economy
picks up, and continues at an above-trend pace, that long-term
unemployment will come down too."
ON OVERALL UNEMPLOYMENT
"Now, the unemployment is a good indicator of the state of
the labor market, if I could only have one, I think that's the
metric I'd probably choose. But there are different things
happening in the labor market we need to take account of.
"For example, part-time employment that's involuntary ... It
is at exceptionally high levels, 5 percent of the labor force.
It's unusually high relative to the unemployment rate. We've
never really seen a situation where long-term unemployment is so
large, so large a fraction of total unemployment, around 35
percent. That's very unusual."
ON FED'S COMMITMENT TO INFLATION
"Everybody on the (FOMC) committee, a formative experience
for them was the 1970s, when we saw very high inflation, and a
huge effort by Chairman (Paul) Volcker to tighten monetary
policy, to bring it down. We moved through a period in which Fed
policy wasn't sufficiently tight and high inflation led to a
rise in inflation expectations. We saw that those inflation
expectations could become a persistent source of high inflation
and that it could be very costly to lower inflation.
"The lessons from that period are very real for all of us,
and none of us want to make that mistake again. I do believe we
have the tools and the determination to avoid that."
"And I can't say that we will get it perfect. But I can tell
you that the committee has adopted a 2 percent inflation
objective in order to make clear our commitment to achieving
that objective and to be held accountable for it."
ON HOUSEHOLD FORMATION, MORTGAGE RATES AND HOUSING
"My expectation is that as the job market strengthens and
the economy strengthens, we'll see household formation pick up.
But it's hard to know here exactly what the new normal is. And I
think we need to see some pick-up in household formation in
order to see continued recovery in the housing market."
"Mortgage rates went up quite a lot over the spring and
summer. They are still quite low by historical standards, so in
that sense housing remains affordable, and I expect housing to
pick up. But really it has flattened out, and a recovery that
seemed to be in progress really has now flattened out."
ON FED'S 6.5 PERCENT UNEMPLOYMENT TRIGGER
"We issued the number 6.5 percent at a time when the
employment rate was around 8 percent, and we were very far from
what anyone could call full employment, which is our goal. We
wanted to indicate to markets that we would need to see a lot of
improvement in labor markets ... before we would dream of
raising our target for short-term interest rates."
"Now we did not say we would raise our target for the
federal funds rate when we reach the level of 6.5 percent ... We
changed our forward guidance only because we were coming close
to 6.5 percent, and we've now crossed that.
"There's no change in the guidance. We're saying that, now
we are there, we want you to understand we have to develop a
more nuanced approach to what's going on in the labor market."
ON RATES AND FISCAL POLICY
"We expect that as the economy recovers that a point will
come when it will be appropriate to raise short-term interest
rates. Long-term interest rates are likely to be rising over
time as that occurs, and this is something I think Congress
should certainly be taking into account as you look at what
fiscal burdens will be down the road."
ON ASSET BUBBLES
"For the equity market as a whole, the answer is valuations
are at historically normal ranges. Long-term interest rates are
low and that is one of the factors that feeds into equity market
valuation. There are pockets where we could potentially see
misvaluations, but overall those broad metrics don't suggest
that we are in obviously bubble territory."
"When the labor market has returned to normal, in the sense
that most people who are looking for work are able to find work
for which they are suited and skilled in a reasonable period of
time, there really won't be much more that is in our domain that
we can do, so we wouldn't keep our balance sheet large or
refrain from raising interest rates for that reason.
"But there are some people who have suggested that the
distribution of income and rising inequality are pulling down
spending and holding down spending growth, and it's hard to get
clear evidence on that. To the extent that that's true, it would
be a way in which inequality would be slowing the pace of
recovery back to full employment, and in that sense it would
affect how long we would hold interest rates where they are."
ON FISCAL DEFICITS
"One recommendation that I would give you is that ... there
is more work to do to put fiscal policy on a sustainable course.
Progress has been made over the last several years in bringing
down deficits in the short term, but a combination of
demographics, the structure of entitlement programs and
historical trends in healthcare costs, we can see that, over the
long term, deficits will rise to unsustainable levels relative
to the economy. Putting in a package of reforms - I know these
are very controversial factors - that would probably help
ON DECLINE IN LABOR PARTICIPATION
"I think it is clear that part of it is demographic, secular
and will continue, and that purely reflects the fact that we
have an aging population ... To me it's clear that the weak
state of the labor market partly explains why we have seen a
decline in labor force participation."
"The labor force participation rate has bounced around, but
it's been roughly stable. So the stable labor force
participation rate could signify that some cyclical slack in the
labor market is gradually diminishing over time. Looking over
three to six months, I would say the patterns we are seeing are
consistent with improvement in the labor market."
ON INFLATION EXPECTATIONS
"Two percent is the committee's longer term objective, and
we would not want to see a persistent deviation either below or
above 2 percent. It won't be at that level at every moment, but
we expect it to move up gradually over time back toward 2
(Compiled by Jonathan Spicer, Lucia Mutikani, Anna Yukhananov
and Ann Saphir)