WASHINGTON (Reuters) - The following are highlights from the question and answer session of a House Financial Services Committee hearing on Tuesday with Federal Reserve Chair Janet Yellen on monetary policy and the U.S. economy.
YELLEN ON SUPERVISION OF BANKS’ ACTIVITIES IN COMMODITIES
“We are thoroughly reviewing our supervision in these areas.”
“We have recently put out an advance notice of proposed rule-making in this area highlighting a number of different issues we want to consider.”
“We will carefully look at the comments and I expect that we will be doing, perhaps likely making, changes in this area...
“I would say though that the Federal Reserve’s main goals of supervision in these areas is to make sure that banks operate their commodities activities in a safe and sound manner.”
YELLEN ON CAPITAL RULES FOR DIFFERENT ENTITIES
“We explicitly decided when we put in effect our capital rules to defer their application to savings and loan holding companies with substantial insurance activities and to the other non banks SIFIs (Systemically Important Financial Institutions) that were designated.”
“We are trying our best to craft a set of capital and liquidity standards that will be tailored to an appropriate risk profiles of the insurance companies.”
“We do face constraints in our ability to do that because the Collins Amendment requires us to establish consolidated minimum risk based leverage and capital requirements to these entities that are no lower than those that apply to depository institutions.”
YELLEN ON FANNIE MAE, FREDDIE MAC
“With respect to GSEs, it is important for Congress to put in place a new system to address GSE reform. We still have a system that has systemic risk. The government funding remains critical to the mortgage sector and I think to really get housing back on its feet it’s important for Congress to put in place a new system and to explicitly decide what role the government should (have) in helping the housing sector.”
YELLEN ON IMPACT OF BANK REGULATION ON ECONOMY
“To my mind, the regulatory agenda of trying to strengthen the financial system will bring important long-term benefits to the economy.”
YELLEN ON CHARGES THE FED IS ENABLING BUDGET DEFICITS
“I don’t think it would be helpful, either in terms of achieving the objectives that Congress has assigned to us or in terms of Congress’ deficit reduction efforts, for us to purposely raise interest rates in order to weaken the economy. The likely impact of that weaker economy would be larger deficits.”
YELLEN ON LONG-RUN BUDGET DEFICITS IMPACT ON THE ECONOMY
“Long-run deficits that are projected to rise in a sustainable way is a trend that has a negative effect on the economy. The larger deficits that we’ve had in recent years in part reflect the weakness of the economy.”
YELLEN ON WHAT IT WOULD TAKE TO PAUSE TAPER
“I think what would cause the Committee to consider a pause is a notable change in the outlook.”
“We would be looking at a broad range of data in the labor market, including unemployment, job creation and many other indicators of labor market performance. We would also be looking at indicators of spending and growth in the economy, because we do need to see growth in an above-trend pace in order to project continued improvement in the labor market. And we note that inflation is running well below our objective and we want to be sure that that is moving back toward our objective.”
YELLEN ON WHAT WOULD CAUSE FED TO BOOST BOND BUYING
“I think a significant deterioration in the outlook, either for the job market, or concerns, very serious concerns, that inflation would not be moving back up over time. But the committee has emphasized that purchases are not on a preset course, and we will continue to evaluate the evidence.”
YELLEN ON MBS VS TREASURIES PURCHASES
Asked whether Fed would consider maintaining MBS purchases and only trim Treasuries purchases if the housing sector slowed: “I think that both kinds of purchases affect interest rates broadly. Purchases of Treasuries tend to push down mortgages rates as well. Some evidence suggests a differential impact but it’s very hard to think of these being discrete.”
YELLEN ON WEAK DECEMBER, JANUARY EMPLOYMENT REPORTS
“I was surprised (by) the jobs reports in December and January, the pace of job creation was running under what I had anticipated. But we have to be very careful not to jump to conclusions in interpreting what those reports mean. There were weather factors; we’ve had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere.
The committee will meet in March. We will have a broad range of data on the economy to look at, including an additional employment report.
I think it’s important for us to take our time to assess just what the significance of this is.
YELLEN ON LABOR FORCE PARTICIPATION DECLINE
“A significant part of the decline in labor force participation is structural and not cyclical. Baby boomers are moving into older ages where there is a dramatic drop off in labor force participation and (with) an aging population we should expect to see a decline in labor force participation...”
“There is no doubt in my mind that an important portion of this labor force participation decline is structural. That said, there may also be, and I am inclined to believe myself based on the evidence - that there are also cyclical factors at work. ...There is no sure-fire way to separate that decline into those components.”
YELLEN ON STEPS CONGRESS CAN TAKE TO AID JOBLESS
“For our part we are trying to do what we can, with monetary policy, to simulate a faster economic recovery to bring unemployment down nationally....
“Monetary policy is not a panacea. I think it’s absolutely appropriate for Congress to consider other measures that you might take in order to foster the same goals.... Certainly all the economists that I know of think that improving the skills of the workforce is one important step that we should be taking to address those issues.”
YELLEN ON BEING A “SENSIBLE CENTRAL BANKER”
“I believe that I am a sensible central banker. These are very unusual times, in which monetary policy for quite a long time has not even been able to do what a rule like the Taylor rule would have prescribed...”
“I have tried to argue and I believe strongly that while a Taylor rule or something like it provides a sensible approach in more normal times like the Great Moderation, under current conditions when this economy has severe headwinds from the financial crisis and (the Fed) has not been able to move the funds rate into the negative territory that rule would have prescribed, that we need to follow a different approach. And we are attempting through our forward guidance to be as systematic and predictable as we can possibly be.”
YELLEN ON FUTURE TAPERING
“If the outlook continues to be one in which we expect and are seeing continued improvement in the labor market that implies growth strong enough going forward to anticipate such improvement, and inflation - which is running below our objective - if we see evidence that will come back toward our objective over time, we’re likely to continue reducing the pace of our purchases in measured steps.”
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