New Federal Reserve Chair Janet Yellen Tuesday reemphasized the Fed’s commitment to continued reduction of large-scale asset purchases, provided the economy performs as the Fed hopes, as she responded to questions from members of the House Financial Services Committee.
She suggested it would take a significant deterioration in the outlook for economic growth, jobs and inflation for the Fed’s policymaking Federal Open Market Committee to alter its “measured” course of “tapering” bond buying.
Yellen also defended the Fed’s policies against charges that the complaints from emerging market, appearing before the Committee to present the Fed’s semi-annual Monetary Policy Report to Congress for the first time.
In December and again in January, the FOMC reduced monthly purchases of longer term Treasury and agency mortgage backed securities in equal $5 billion amounts, taking total purchases from $85 billion to $75 billion and then from $75 billion to $65 billion.
Going forward, Yellen gave no indication of any preference for reducing Treasuries or MBS in larger amounts.
Following prepared testimony in which she said she “fully supports” the Fed’s tapering policies, Yellen explained that the FOMC decided in December that “enough progress” had been made toward its goal of “substantial improvement” in the outlook for the labor market that it was appropriate to begin a “measured” reduction in the pace of asset purchases.
The continuation of the “measured” pace of tapering is conditional, she said, while indicating, as many of her colleagues have, that the bar is fairly high for interrupting or moderating the process.
She said the FOMC “purposely decided … to act with measured steps so we could watch what’s happening in the economy.”
“If the outlook continues to be where we see continued improvement in the labor market … that implies growth going forward … such improvement and … if we see evidence (that inflation will) come back toward our objective … we are likely to continue (tapering)… in measured steps.”
However, she echoed the FOMC’s own policy statement in saying the pace of tapering is “not on a preset course” – a point she made several times.
“If the Committee judges there has been changes in the outlook it would reconsider what’s appropriate in the program.”
When asked whether the weaker than expected December and January non-farm payroll gains will cause the FOMC to “pause” tapering, Yellen strongly suggested that it is far too early to consider such a step.
Yellen conceded she “was surprised that in the jobs reports in December and January the pace of job creation was running under what I anticipated.”
“But we have to be very careful not to jump to conclusions in interpreting what those reports mean,” she continued, noting that “there were weather factors … that may be affecting economic activity in the job market.”
Yellen observed that the FOMC will meet March 18-19, when it will have additional jobs and other economic data to assess. And she said, “It’s important for us to take time to assess what the significance is” of recent employment reports.
Asked what it would take for the FOMC to “pause” its tapering, Yellen replied, “I think what would cause the committee to consider a pause is a notable change in the outlook.”
Recalling that the FOMC decided to scale back QE3 because “it believed the outlook was one where we would see continued improvement in the labor market and inflation moving back up to our 2% target,” she said that “if incoming data were to cause the committee looking broadly at all of the evidence to question that” the FOMC might consider pausing.
Asked what specifically the FOMC would look at in deciding whether to pause tapering, Yellen said, “We would be looking at a broad range of data in the labor market, including unemployment, job creation, and many other indicators of labor market performance.”
She said the FOMC “would also be looking at indicators of spending and growth in the economy because we do need to see growth at an above-trend pace in order to project continued improvement in the labor market.”
And with “inflation is running well below our objective,” she added that “we want to be sure that that is moving back toward our target.”
When asked what it would take for the FOMC to increase asset purchases, Yellen seemed a bit taken aback, before answering, “It would take a significant deterioration in the outlook, either for the labor market, or very serious concerns about inflation not moving back up over time.”
As for the proportion of Treasuries and MBS the Fed should buy, Yellen sounded ambivalent.
“I think both types of purchases affect interest rates broadly,” she said. “MBS tend to push down mortgage rates as well … (but) it’s hard to think about these as discrete.”
Regarding the recent financial turmoil stemming from problems in emerging markets, which some have blamed on Fed tapering, Yellen made only a glancing reference in her prepared text: “We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”
When the subject came up in the question-and-answer session, Yellen made clear she does not think the FOMC should alter its policies to soften the blow of tapering on emerging markets.
The FOMC is merely pursuing the domestic objectives set out for it by Congress, she said.
“Certainly capital markets are global and the monetary policies of any country affect other countries in such a world.” she said, but “we’ve been very clear” about the FOMC’s intentions regarding quantitative easing.
“From the outset we initiated asset purchases and accommodative policy more generally to pursue the goals Congress has assigned to the Federal Reserve” – namely maximum employment with price stability, she said.
“We have tried to be as clear as we possibly can about how we conduct this policy,” she went on. “We’ve been quite clear from the outset that as the recovery advanced we would wind down or reduce pace of asset purchases” and that “as growth picks up, and as inflation comes back toward (target) we would eventually normalize” monetary policy.