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Yellen Says Fed Should Not Withdraw U.S. Stimulus Too Soon

Bloomberg, Nov 14, 2013

Janet Yellen, the nominee for chairman of the Federal Reserve, said she’s committed to promoting a strong economic recovery and will ensure monetary stimulus isn’t removed too soon.

“I consider it imperative that we do what we can to promote a very strong recovery,” she said in response to a question during testimony today to the Senate Banking Committee in Washington. “It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero.”

Stocks extended records as Yellen’s testimony signaled she will maintain the strategies of Fed Chairman Ben S. Bernanke, whose term ends on Jan. 31. As vice chairman, Yellen has helped Bernanke craft the most aggressive easing program in the Fed’s 100-year history, including a commitment to buy $85 billion a month in bonds until the outlook for the labor market has “improved substantially.”

“It will be a pretty smooth transition,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “The evidence that we’re seeing now — the continued slack in the economy, the low trend in inflation — suggests the Fed will maintain the course at least for the time being.”

The Standard & Poor’s 500 Index climbed 0.5 percent to 1,790.62 at the close of trading in New York. The yield on the 10-year Treasury note fell three basis point to 2.7 percent. Silver and gold futures climbed at least 1.5 percent to lead commodities higher.

Costs, Benefits

The banking committee, consisting of 12 Democrats and 10 Republicans, plans to vote on Yellen’s nomination as early as next week, according to a banking committee aide. Her nomination would then move to the full Senate, where she’ll need the support of at least 60 senators to win confirmation.

“The committee seemed to bend over backwards, even the known critics of her and her boss’s policies, in their questioning,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It is looking more likely she will be confirmed.”

Under two hours of mostly genial questioning, Yellen, 67, said the benefits of the bond-buying program still outweigh the costs. While calling for stronger regulation to help protect the financial system, she said she’d like to see more progress lowering unemployment, now at 7.3 percent, and that she doesn’t see asset-price bubbles emerging in equities or property.

“History says that no Fed chair has ever got fewer than 70 votes, so I would assume that Republicans will cooperate and do the right thing here,” said Sherrod Brown, an Ohio Democrat.

‘Meaningful Contribution’

Yellen said the central bank’s asset purchases “have made a meaningful contribution to economic growth and improving the outlook,” and that the program “will not continue indefinitely.” She also emphasized her commitment to the Fed’s 2 percent inflation goal and strengthening financial regulation.

“Pursuing a policy of low rates to get the economy moving will best enable us to normalize policy and to get rates back to normal levels over time,” Yellen said.

Yellen drew questioning from Republican senators for her support of bond purchases and from Democrats for widening income inequality in the U.S., yet the exchanges were seldom contentious.

“Most senators seemed to treat this as a formality,” said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York and a former Fed economist. “The general expectation in Washington seems to be that she will be confirmed.”

Key Rate

Yellen said the Fed’s key interest rate would remain low even after officials start to pare back on bond purchases.

“As that program gradually winds down, we’ve indicated that we expect to maintain a highly accommodative monetary policy for some time to come thereafter,” she said.

Yellen also said policy makers could reconsider whether to cut the interest rate it pays on excess reserves, currently 0.25 percent.

“It certainly is a possibility,” Yellen said. So far, U.S. central bankers have been concerned that lowering the rate would damage the functioning of the money-market, she said.

The Fed has held its main rate near zero since December 2008, and the Federal Open Market Committee pledges to keep it there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t rise above 2.5 percent.

Asset Bubbles

Republican Senators, including Mike Johanns of Nebraska and Dean Heller of Nevada, asked Yellen if the Fed’s low-rate policies are inflating asset-price bubbles in stocks and real estate, echoing concerns among some Fed officials.

“By and large, I would say that I don’t see evidence at this point in major sectors of asset-price misalignments, at least, of a level that would threaten financial stability,” Yellen said.

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

At the same time, “it is very important for us to monitor financial risks that could be developing as a consequence of the program,” she said. “No one wants to live through another financial crisis.”

The S&P 500 has rallied more than 25 percent this year, putting it on pace for the best annual gain in a decade. The gauge has rebounded 163 percent from a 12-year low in March 2009, adding more than $10 trillion in market value.

Regulatory Policy

She said supervisory tools should be the “first line of defense” against bubbles, and she would consider using monetary policy only as a last resort because it’s a “blunt tool.”

The FOMC began $40 billion in monthly purchases of mortgage-backed securities in September 2012 and announced $45 billion in Treasury securities to that pace in December.

Four of the committee’s Republicans, including Idaho Senator Mike Crapo, the senior member, opposed Yellen when she was considered for Fed vice chairman in 2010.

The other banking committee Republicans who previously opposed Yellen are Alabama’s Richard Shelby, Louisiana’s David Vitter and Tennessee’s Bob Corker. She was supported in 2010 by Nebraska’s Johanns.

“I don’t know that it’s reconcilable philosophically — we’re obviously in a very different place,” Corker said. He said that Yellen is “a very qualified person, very likable and very transparent and I do appreciate all those characteristics, so we’ll see.”

Vitter said after the hearing that he’ll opposed Yellen’s confirmation.

“She made it crystal clear today that she would continue the Fed’s current policies of continuing ‘Too Big to Fail’ and free money, quantitative easing, with no wind-down in sight,” Vitter said. None of the panel’s Democrats have said they’ll oppose her nomination.

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