WASHINGTON – Federal Reserve Chairwoman Janet Yellen made it clear Wednesday that she believes the economy still requires a strong dose of stimulus five years after the recession ended because employment and inflation are well short of the Fed’s goals.
“A high degree of monetary accommodation remains warranted,” Yellen said 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 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.”
Yellen, questioned by Rep. 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.
Silence about time frame
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 time frame she hasn’t repeated.
Responding to a question from Sen. Amy Klobuchar, D-Minn., 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.
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 chairwoman 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.
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.