Fed Chair Yellen: The “Bernanke Asset Bubble” is here to stay
Federal Reserve Chair Janet Yellen made it clear she believes the economy still requires a strong dose of stimulus five years after the recession ended because unemployment and inflation are well short of the Fed’s goals.
“A high degree of monetary accommodation remains warranted,” Yellen said today in testimony to the Joint Economic Committee of Congress. “Many Americans who want a job are still unemployed,” and inflation is below the central bank’s 2 percent target, she said.
Yellen highlighted weaknesses in the labor market, such as the number of long-term unemployed, even as the economic outlook improves. The Treasury market yield curve steepened after her comments tempered expectations among some investors for a faster pace of interest-rate increases.
“She wants to reiterate that there are still challenges, we’re not out of the woods yet, and it’s too early to think about starting to remove accommodation,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “She put the labor-market recovery in historical context, which is that there are still a lot of scars left from the incredibly deep recession.”
Five-year yields dropped three basis points to 1.65 percent at 3:11 p.m. in New York, based on Bloomberg Bond Trader data. The 30-year bond yield increased as much as three basis points to 3.41 percent before trading at 3.4 percent.
An increase in longer-term yields indicates investors see inflation accelerating, while shorter maturities are anchored by the Fed’s policy rate.
Yellen, questioned by Representative Kevin Brady, a Texas Republican who heads the committee, repeatedly declined to specify when the benchmark interest rate might rise.
“There is no mechanical formula or timetable for when that will occur,” she said. She repeated the Federal Open Market Committee statement that the rate will stay near zero for a “considerable time” after the Fed ends its bond-purchase program intended to spur growth.
In March, Yellen responded to a reporter’s question by saying the rate might start to rise about six months after the Fed ends its asset purchases, a timeframe she hasn’t repeated.
Responding to a question from Senator Amy Klobuchar, a Minnesota Democrat, Yellen called rising disparity in both incomes and wealth “very disturbing” and said that is another reason why the Fed is promoting a stronger economy.
She declined to be drawn into issues outside the Fed’s remit. Asked by Senator Bernie Sanders, a Vermont independent, whether it makes sense to give “enormous tax breaks to the families of the top 1 percent of people,” she said: “It’s up to the Congress to decide what’s appropriate.”
Economic data show “solid growth” in the second quarter, bolstering the case for a faster expansion this year, Yellen said in her opening remarks. Gains in household wealth from rising home prices, less drag from federal and state and local budgets, and stronger growth abroad should all drive investment and consumption.
The Fed chair cited the slowdown in U.S. housing as a risk, along with “heightened geopolitical tensions” and financial stress in emerging markets.
“While conditions in the labor market have improved appreciably, they are still far from satisfactory,” Yellen said. She called the unemployment rate, which stood at 6.3 percent in April, “elevated,” and said the share of the labor force that has been unemployed for more than six months, as well as those working part-time who would prefer full-time work, “are at historically high levels.”
“We’ve never really seen a situation where long-term unemployment is so large a fraction of unemployment,” she said in response to a question.
Reaching for Yield
Yellen also discussed financial conditions in her opening remarks, saying she saw “reach-for-yield” behavior in lower-rated corporate debt markets. At the same time, she said stock and home values remain within “historical norms.”
The Fed also “is considering whether additional measures are needed to further reduce the risks associated with large, interconnected financial institutions,” Yellen said, without elaborating.
Payrolls rose last month by 288,000 in the biggest gain in two years, and the jobless rate was the lowest since September 2008, according to a May 2 Labor Department report.
The number of Americans working part-time because they couldn’t find full-time jobs rose by 54,000 to 7.47 million, while the labor-force participation rate slumped to 62.8 percent, matching the lowest level since 1978. Average hourly earnings growth tumbled to 1.9 percent from a year earlier, the weakest gain since March 2013.
Still, signs of strength in the economy and a steady pace of job gains are allowing the Fed to gradually reduce the pace of bond purchases intended to boost growth.
Fed officials last week trimmed stimulus for the fourth consecutive meeting, saying the economy has strengthened after harsh winter weather slowed growth to a 0.1 percent annual pace in the first quarter.
Policy makers cut monthly bond purchases by $10 billion to $45 billion and are on track to halt buying in the second half of 2014. Gross domestic product will expand at a 3 percent annualized rate this quarter and next before accelerating to 3.1 percent in the final quarter of this year, according to the median of economist estimates compiled by Bloomberg.
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