WASHINGTON, Feb 11 (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.
“An environment of low interest rates can incent the development of bubbles. We can’t take monetary policy off the table as a tool used to address it. It’s a blunt tool.”
“And certainly supervision and regulation should play a role in more targeted policy.”
“Wages have not kept up with productivity. For the last number of years we have seen a shift in the distribution of income away from the labor share of work towards capital share. It’s fully not understood what accounts for that trend. But it is a disturbing trend because it suggests that workers, even though they are being productive, their wages in real terms are not keeping up with that. It is a very worrisome trend in terms of living standards.”
“The fact that we have very long spells of unemployment ... suggest(s) that the job market is not strong enough to be able to provide people with jobs who want to work, which is roughly another way of stating what our employment goal is. And, so, it’s a mark that there’s a great deal of slack in the labor market still.”
“I think fiscal policymakers should never put our nation in a situation where there is risk of defaulting on the federal debt. It would be an extremely destructive thing to do from the point of view of our economy, the financial markets, of global financial markets.”
“It would be catastrophic to not raise the debt limit.”
YELLEN ON TREASURY, FED DEBT LIMIT CONTINGENCY PLANNING, POSSIBILITY OF PRIORITIZING FEDERAL PAYMENTS
”To the best of my knowledge there is no written down plan... That’s a matter that is entirely up to the Treasury. That is not the domain of the Federal Reserve... I don’t know that we could do that (if asked by the Treasury to develop a plan for the prioritizing federal payments in the event of a debt limit impasse).
YELLEN ON BANK OF JAPAN‘S MONETARY POLICY
“Countries should be allowed to use monetary policy to pursue domestic gains, certainly not to target the value of the currency or to attempt to improve its competitive situation but to address broad economic concerns.”
“It is natural and logical after such a long period of deflation the government, the Bank of Japan should want to put in place a set of policies to end that.”
“Monetary policy does have exchange rate impacts. I see the Bank of Japan’s policy is intended and at least it looks favorable for now - seems to be moving inflation out of deflation territory.”
“We are very much worried about the possibility that it could become structural. Thirty-six percent of all unemployment is in long-term spells of 26 weeks or greater. And we know when people are unemployed for that long they surely must get discouraged, they begin to lose their networks that enabled them to find jobs, and may decide to drop out of the labor force permanently. They may begin to lose the skills that are necessary find jobs. Employers tend not to want to hire people who are long-term unemployed. The notion that something that should be temporary could become a permanent source of job losses, is a huge problem for the economy and of course households.”
“I think (farm) land prices have been going up at a remarkable rate even before the stock market began to recover, and certainly have caught our attention as an area where we would be concerned about valuations. We have been watching that very closely...”
“I think it’s fair to say our monetary policy has had an effect of boosting asset prices. We have tried to look carefully at whether or not broad classes of asset prices suggest bubble-like activity. I have not seen that in stocks, generally speaking. Land prices, I would say, suggest a greater degree of overvaluation.”
“We recognize that in an environment of low interest rates like we’ve had in the Unites States now for quite some time, there may be an incentive to reach for yield. We do have the potential to develop asset bubbles or a build up in leverage or rapid credit growth or other threats to financial stability. Especially given that our monetary policy is so accommodative, we are highly focused on trying to identify those threats.”
“The dollar plays a critical role in the global economy, and it’s the Federal Reserve’s job to make sure that inflation remains under control so that the dollar remains a safe and sound currency and can continue to play that role.”
YELLEN ON OPPOSITION TO “AUDIT-THE-FED” LEGISLATION
”What I don’t agree with and have strongly opposed is interfering with the independence of monetary policy by bringing political pressures to bear on the committee’s judgment about what is the appropriate way to implement monetary policy....
”You should hold us accountable and ask us to explain how our policies advance the goals that you have assigned us....
“We sometimes have to make difficult decisions that would be hard for the Congress to make in the best long-run interest of the economy.”
YELLEN ON FED‘S EXEMPTION FROM AUDITS
“This is an exemption that has been granted the Federal Reserve that’s (been) central to our independence for decades by Congress. I don’t believe the Federal Reserve is in any way corrupt. I believe that the confidence of markets in the Federal Reserve and our monetary policy making would not be enhanced by that type of audit.”
“I strongly support the Federal Reserve’s dual mandate - both price stability and employment. I feel very strongly that the Fed’s dual mandate to focus on both employment and price stability will serve this country well. We are committed to pursuing both parts of that mandate and we are doing so.”
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.”
“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.”
“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.”
“To my mind, the regulatory agenda of trying to strengthen the financial system will bring important long-term benefits to the economy.”
“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.”
“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.”
“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.”
“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.”
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.”
”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.
“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.”
”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.”