Fed chairman Yellen provided no surprises in her prepared remarks to the Joint Economic Committee of Congress today. Thus she reiterated the views expressed by the FOMC at its most recent meeting last week, although she sounded a bit more concerned about the recent slowdown in the housing market and the situation in Ukraine, but without mentioning Ukraine. Unsurprisingly Yellen still sees lots of slack in the economy and believes that easy policy remains warranted.
Here are five quick takeaways from the prepared remarks:
- Yellen’s testimony makes clear that the Fed isn’t overly concerned about the dismal growth numbers that came in for Q1. “Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter.”
- She does, however, sound a bit more concerned about the recent slowdown in the housing market than the FOMC did last week: “One cautionary note, though, is that readings on housing activity – a sector that has been recovering since 2011 – have remained disappointing so far this year and will bear watching.” …“Another risk – domestic in origin – is that the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”
- Yellen also touched on the risk that the situation in Ukraine could pose to the world economy, though she doesn’t specifically reference the country, saying that “one prominent risk is that adverse developments abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies, could undermine confidence in the global recovery.”
- Unsurprisingly Yellen still sees a lot of slack in the economy: “While conditions in the labor market have improved appreciably, they are still far from satisfactory … [B]oth the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly—another signal that a substantial amount of slack remains in the labor market.” Accordingly she still believes that “a high degree of monetary accommodation remains warranted”. Hence, no new policy signals.
- Finally, Yellen tried to ease the concern that the Fed’s policies could be fuelling bubbles or other threats to financial stability. She said that while there is some evidence of investors reaching for yield, nothing has gotten too far: “While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date – particularly at the largest banks and life insurers. More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms…. For the financial sector more broadly, leverage remains subdued and measures of wholesale short-term funding continue to be far below levels seen before the financial crisis.”