WASHINGTON May 8 The following are highlights
of Federal Reserve Chair Janet Yellen's testimony on the U.S.
economic outlook to the Senate Budget Committee on Thursday.
Yellen's prepared remarks to the committee were identical to
comments she made to the congressional Joint Economic Committee
in testimony on Wednesday.
YELLEN ON MONETARY POLICY NOT BEING A PANACEA:
"Monetary policy is not a panacea, but I think maintaining a
policy of low interest rates has been helpful in a number of
ways. It has helped to get housing back on track, helped the
housing sector more broadly. House prices have risen, that
helped the financial situation of many households. Low interest
rates may be less of a factor in stimulating capital spending,
but I think there are a number of sectors of the economy that
have responded favorably to our policy of low interest rates. It
has helped stimulate demand and job growth. It's been helpful.
Again, I would not say it's a panacea."
YELLEN ON FED'S 2 PERCENT INFLATION OBJECTIVE:
"We've now had a long period since the early or mid-90s in
which inflation has averaged 2 percent and, if you look at
inflation expectations they run around 2 percent and they have
been very stable and well-anchored, and they have not moved
around when actual inflation on some temporary basis has
diverged from 2 percent. And that is a huge asset to this
country to have stable, well-anchored inflation expectations...
"I would not favor trying to raise our inflation objective
above where it is."
YELLEN ON INFLATION EXPECTATIONS:
"I am not aware of anyone in the Federal Reserve who adheres
to the notion that there is a permanent tradeoff between
unemployment and inflation. We all recognize that inflation
expectations matter, and can shift over time.
"All of us lived through the '70s where we saw that happen.
None of us want to or would be willing to see that happen again.
"And it's why in our statements we constantly reference
the importance of inflation expectations and their stability,
and the fact that they are anchored, in terms of describing our
policy and how it will be conducted."
YELLEN ON BALANCE SHEET:
"We all expect our balance sheet to gradually decline over
time, after we regard it as appropriate to begin to tighten
policy. We've not decided, and we'll probably wait until we're
in the process of normalizing policy to decide just what our
long-run balance sheet will be. But clearly it will be
substantially lower than it is now and will take a period, a
number of years. This could happen simply by ending our
reinvestment policy at some point. If we do that and nothing
more, it would probably take somewhere in the neighborhood of
five to eight years to get it back to pre-crisis levels."
YELLEN ON RATE HIKES IMPACT ON FEDERAL DEBT BURDEN:
"In thinking about what will happen to the deficits and the
debt, it's important to keep in mind that a stronger economy
will be very good for the federal budget deficit. There will be
stronger revenues coming in and a decline in social safety net
spending and that will be an offset (to higher interest
rates)... Yes, interest payments will go up, but I believe the
larger piece of it is likely to be that a stronger economy will
improve the budget."
YELLEN ON FED'S PLAN TO REDUCE BOND BUYING:
"What we need to see in order to follow that plan is
continued improvement in the labor market and an overall pattern
of growth that is sufficient to cause us to project continued
"Our objective is to make sure that the economy moves back
to full employment or maximum employment, and we are making
"Whenever we meet we ask ourselves the question, 'do we
continue to believe that the economy is on a path that will take
us toward our objective of reaching full employment or maximum
employment?' And we also think about inflation, which is running
below our 2-percent objective and ask ourselves, 'does incoming
evidence suggest that inflation will also be moving back up to 2
percent over time?
"If the answer to those two questions is 'yes,' we will
continue to reduce the pace of our asset purchases.
"Now, if the economy outlook were to change in such a way
that we no longer felt the answer to those questions was 'yes,'
then we would reconsider our plans."
YELLEN ON PUTTING COMMUNITY BANKER ON FED BOARD:
"Certainly I am in favor of that. We just lost two
individuals who are very familiar with community banking:
Governor Duke, who ran a community bank in Virginia and who had
a lifetime of experience in community banking, and Governor
Raskin, who has now moved to become deputy Treasury Secretary,
who served as commissioner of banking in Maryland and got to
know the community banks and the community bank regulatory
issues very closely."
"They made huge contributions and I would love to see a
YELLEN ON COMMUNITY BANK REGULATION:
"There's no question that they do feel that banking
regulation has become more burdensome but I pledge that I will
continue to work with my colleagues to do all that we can to
make sure that we reduce the burdens on these community banks
and do not in any way have a one size fits-all approach. I don't
think that would be appropriate."
YELLEN ON LABOR MARKET RECOVERY:
"Our objective in monetary policy is to continue to maintain
an accommodative monetary policy for as long as necessary to see
recovery of the labor market, to a state. It's hard to know
exactly how to characterize it quantitatively, but what the
Federal Reserve now calls maximum employment, we used to call
full employment and in many ways we are far from that.
And that is part of the reason why not only is there a
shortage of jobs, but also, I think wages are rising as slowly
as they are. Our mission is both to make sure that inflation
moves back to our 2 percent objective, but also to want to
foster continued recovery in the labor market to help Rhode
Island and other places like it."
YELLEN ON HOUSING RECOVERY:
"Of course the recovery of the housing sector is very
important. To see that ongoing is important to our recovery and
has been a very important factor in the downturn."
YELLEN ON FISCAL POLICY, UNCERTAINTY:
Fiscal policy, while it has accomplished a very meaningful
reduction in the budget deficit, as you pointed out has served
as a drag on spending and aggregate demand in the economy and in
a sense this has been part of the headwinds that the Federal
Reserve has had to confront in designing our own monetary
policy....Having a long-run sustainable fiscal policy, a debt to
GDP path, that can be maintained over time does require changes,
but it doesn't require changes that would come into effect so
quickly that it would impede the recovery....
I think probably all of you have had the same experience
that I've had as you talk to business people around the country,
and to households as well, who do talk about uncertainty
surrounding fiscal policy and that crisis atmosphere along with
other elements of regulation and uncertainty about the outlook,
as something that has diminished their willingness to hire and
(Compiled by Ann Saphir, Elvina Nawaguna and Lisa Lambert)