Washington - The US central bank was on track to keep reducing its policy stimulus, Federal Reserve chairwoman Janet Yellen said yesterday, even as she acknowledged that the recovery in the US labour market was “far from complete”.
In her first public comments as Fed chief, Yellen said the central bank would need to keep its eye on a broad range of labour market indicators, not just the unemployment rate, as it continued to assess the health of the jobs market.
Yellen, in testimony prepared for delivery to a congressional committee, nodded to the recent volatility in global financial markets, but said at this stage it did “not pose a substantial risk to the US economic outlook”.
She emphasised continuity in the Fed’s policy strategy, saying she strongly supported the approach driven by her predecessor, Ben Bernanke. Under Bernanke, the Fed bought trillions of dollars worth of bonds to drive long-term borrowing costs lower. In December, it started to scale back its latest asset purchase programme.
While the US unemployment rate had fallen 1.5 percentage points since the latest bond-buying programme began in September 2012, at 6.6 percent the rate remained “well above levels” the Fed saw as consistent with maximum sustainable employment, she said.
“The recovery in the labour market is far from complete,” she told the House financial services committee.
Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December; it now buys $65 billion (R721bn) in treasuries and mortgage bonds each month.
Yellen said the Fed would “likely reduce the pace of asset purchases in further measured steps at future meetings”, if economic data broadly supported policymakers’ expectation of improved labour markets and a rise in inflation.
She said, however, that the purchases were not on a pre-set course, repeating the Fed’s policy line.
Prices for US government bonds fell and the dollar rose against the euro and the yen as investors digested Yellen’s comments. US stock futures were up in volatile trade.
“It’s very obvious she is working from the same playbook as Bernanke,” Tom Porcelli, the chief US economist at RBC Capital Markets, said. “The Fed will continue [to] cut its bond purchases by $10bn at each policy meeting the rest of the year.”
Yellen, in just her second week on the job, cited the “unusually large fraction” of jobless Americans who have been out of work for more than six months, and the “very high” number of part-time workers who would prefer full-time jobs.
“These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the US labour market,” she said.
The Fed has said it would not raise rates until the jobless rate dropped to at least 6.5 percent as long as inflation looked to remain under control. But with the jobless rate on the cusp of breaching this threshold, policymakers are considering how best to adjust their guidance.
Yellen said the Fed was watching the recent market volatility closely. - Reuters