Federal Reserve Chair Janet Yellen sought Tuesday to reassure investors that she will embrace the approach to interest-rate policy that her predecessor, Ben Bernanke, pursued before he stepped down as chairman last month.
Yellen told Congress that if the economy keeps improving, the Fed will take “further measured steps” to reduce the support it's providing through bond purchases.
In her first public comments since taking over the top Fed job last week, Yellen said she expects a “great deal of continuity” with Bernanke. She signaled that she supports his view that the economy is strengthening enough to withstand a pullback in stimulus but that rates should stay low to further improve a still-lackluster economy.
Her message of continuity at the Fed was a reassuring one for investors, and it contributed to a rally on Wall Street. The Dow Jones industrial average jumped 190 points in early-afternoon trading.
Yellen's remarks to a House committee suggested that the Fed will keep its key short-term rate near zero for a prolonged period.
“The recovery in the labor market is far from complete,” Yellen said, an indication that the Fed is in no hurry to boost short-term rates.
She said the Fed is monitoring volatility in global markets but doesn't think it poses a serious risk to the United States at the current time.
“Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and strengthening the financial system,” Yellen said in her testimony for the House Financial Services Committee. “Still, there is more to do.”
Some Republicans expressed concern that the Fed's extraordinary support could eventually ignite high inflation or destabilize financial markets. The committee chairman, Jeb Hensarling, R-Texas, a critic of the Fed, said there were “clearly limits to what monetary policy can achieve.”
Hensarling questioned whether the Fed had sent confusing signals to investors by changing its possible timetable for future actions on interest rates.
Yellen, the first woman to lead the central bank in its 100 years, was delivering the Fed's twice-a-year report a week after being sworn in to succeed Bernanke. He stepped down Jan. 31 after eight years as chairman.
Several committee members praised Yellen for breaking down a gender barrier at the Fed. Rep. Gregory Meeks, D-N.Y., told Yellen she would serve as an inspiration for his three daughters and said: “You have done it the old-fashioned way. You have earned it.”
She was pressed by some Republicans to explain why she opposed legislation that would subject the Fed to audits by the Government Accountability Office, the auditing arm of Congress, on its rate decisions. Yellen noted that the Fed is already subject to GAO audits in some areas. But she said that allowing the GAO to second-guess interest-rate actions would subject the Fed to improper political influence.
Rep. Michele Bachmann, R-Minn., argued that the Fed was wrong to oppose the audit legislation. “The American people are feeling less and less empowered to hold the Fed responsible,” Bachmann told Yellen.
At the other end of the political spectrum, Rep. David Scott, D-Ga., urged Yellen to be bolder in addressing long-term unemployment. He said many older workers who had been laid off and young people trying to enter the workforce were growing increasingly frustrated. He said Yellen should oppose Republican efforts to end the Fed's dual mandate to pursue maximum employment and price stability so it could focus solely on inflation.
Yellen said she felt the Fed's dual mandate “has served this country well.”
Many economists think the Fed bond buying, which totaled $85 billion a month during 2013, will be reduced in $10 billion increments this year until the purchases are eliminated in December. The purchases of Treasury and mortgage bonds are aimed at stimulating the economy by keeping long-term loan rates low.
Rep. Carolyn Maloney, D-N.Y., asked Yellen to outline what developments might cause the Fed to slow or suspend its reductions in bond purchases. Maloney asked whether the weak job reports for December and January might prompt a pause.
Yellen acknowledged that she was surprised by the sluggish job gains the past two months. But she cautioned against “jumping to conclusions.” She suggested that job growth might have been held down by severe weather and was not necessarily a signal of a hiring slowdown. She noted that when the Fed next meets March 18-19, it will have another employment report to review.
<p>Yellen said the Fed won't likely change its pace of bond reductions unless it sees a “notable change” in the economic outlook. The Fed is forecasting that the economy and the job market will continue to strengthen in 2014.
On bank regulation, Yellen said the Fed was committed to implementing the 2010 Dodd-Frank Act, which overhauls regulation to try to prevent a future financial crisis. But she agreed in response to questions that bank oversight that's too aggressive can keep banks from making loans that small businesses need to operate.
Yellen repeated the Fed's assurances that it intends to keep its key short-term rate near zero “well past” the time the unemployment rate drops below 6.5 percent as long as inflation remains low. Most economists don't expect short-term rates to be increased until late 2015.
The unemployment rate in January fell to 6.6 percent, the lowest point in more than five years. Still, in her testimony, Yellen said unemployment remained “well above levels” that Fed officials think are consistent with its goal of maximum employment. She said the job market still faces problems, notably many people who have been out of work for more than six months.
The Fed's three rounds of bond purchases have driven its holdings above the $4 trillion mark — four times its level before the financial crisis struck with force in 2008. Eventually, the Fed will need to sell those investments without sending interest rates soaring or otherwise destabilizing markets.