Vice chairman Janet Yellen's testimony before the Senate contained few surprises. Yet, it did not prevent equities to rise, and US dollar and yields to fall, as the upcoming Fed chairman reiterated her dovish stance and defended the central bank's accommodative monetary easing measures. Yellen indicated that the best way to normalize monetary policy is to normalize the economy, noting that 'a strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases' and 'Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy'. In short, economic developments remain the key determinant of the tapering schedule on which Yellen refrained from giving any hints.
Senators criticized the negative impacts of low rates on deposits and risks to financial stability. While admitting that low interests rates hurt savers, Yellen noted that slack demand would have resulted in low yields even if the Fed had not implemented monetary policies and/or QE. Instead, the Fed's easing has supported the job and housing markets. Concerning risks on financial stability, Yellen defended that she has not see signs of systemic bubbles despite the large size of the balance sheet. Yet, she affirmed that the Fed has been monitoring the risks. In contrast with the case of Bernanke, senators did not questioned about the inflationary risks. After all, Yellen stayed consistent with the Fed's mandate to keeping the Fed's long-run inflation target at 2%. She also stated that she and her colleagues have been striving to maintain price stability.
Another mandate of the Fed is on employment. Yellen appeared to be skeptical of the representativeness of the employment figure (e.g. the unemployment rate) on the actual job market conditions. Indeed, in previous occasions, Bernanke noted that the drop in labor force participation has partly led to the apparent decline in the unemployment rate, and this likely has overstated actual improvement in labor markets. The Fed might find it difficult to rely on the reported statistics in assessing the real employment conditions. Yellen also cited similar reasons to warn that the job market is probably not as healthy as suggested by the job market data. These comments might trigger to speculations of the recent hot topic that the Fed might lower the unemployment threshold. Unfortunately, we failed to get any hint from Yellen. While her comments appeared to support a lowering of unemployment rate threshold as part of the FOMC's communication on interest rate policy, Yellen at the same time noted that there may be resistance should the Fed move the threshold to 6% or below.
As an existing core Fed member, it's expected the Yellen's comments were mainly supportive of the Fed's monetary policies. She explicit stated that she believed the benefits of asset purchases and lower rate for longer guidance exceeded the costs both in terms of financial stability and inflation risks.
Senators criticized the negative impacts of low rates on deposits and risks to financial stability. While admitting that low interests rates hurt savers, Yellen noted that slack demand would have resulted in low yields even if the Fed had not implemented monetary policies and/or QE. Instead, the Fed's easing has supported the job and housing markets. Concerning risks on financial stability, Yellen defended that she has not see signs of systemic bubbles despite the large size of the balance sheet. Yet, she affirmed that the Fed has been monitoring the risks. In contrast with the case of Bernanke, senators did not questioned about the inflationary risks. After all, Yellen stayed consistent with the Fed's mandate to keeping the Fed's long-run inflation target at 2%. She also stated that she and her colleagues have been striving to maintain price stability.
Another mandate of the Fed is on employment. Yellen appeared to be skeptical of the representativeness of the employment figure (e.g. the unemployment rate) on the actual job market conditions. Indeed, in previous occasions, Bernanke noted that the drop in labor force participation has partly led to the apparent decline in the unemployment rate, and this likely has overstated actual improvement in labor markets. The Fed might find it difficult to rely on the reported statistics in assessing the real employment conditions. Yellen also cited similar reasons to warn that the job market is probably not as healthy as suggested by the job market data. These comments might trigger to speculations of the recent hot topic that the Fed might lower the unemployment threshold. Unfortunately, we failed to get any hint from Yellen. While her comments appeared to support a lowering of unemployment rate threshold as part of the FOMC's communication on interest rate policy, Yellen at the same time noted that there may be resistance should the Fed move the threshold to 6% or below.
As an existing core Fed member, it's expected the Yellen's comments were mainly supportive of the Fed's monetary policies. She explicit stated that she believed the benefits of asset purchases and lower rate for longer guidance exceeded the costs both in terms of financial stability and inflation risks.
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