May 7, 2014 / 2:50 PM / 4 years ago

HIGHLIGHTS-Fed chief Yellen's testimony to congressional committee

WASHINGTON, May 7 (Reuters) - 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 Wednesday.


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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.”


“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 confidence.”


“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.”


“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 percent.” (Compiled by Jonathan Spicer, Lucia Mutikani, Anna Yukhananov and Ann Saphir)

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