Tuesday, February 11, 2014

Yellen doesn't see risk to US economy from volatility

    The U.S. Federal Reserve does not believe the recent volatility in global financial markets poses a substantial risk to the U.S. economy, Janet Yellen, the new chair of the Federal Reserve said in her prepared testimony to a congressional committee.
    In her first public appearance since taking over from Ben Bernanke last week, Yellen largely repeated the January statement by the Fed's policy making body, the Federal Open Market Committee (FOMC), and said she wanted to "emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy."
    In December the Fed decided the U.S. economy was strong enough to begin the process of unwinding its monthly asset purchases of $85 billion and reduced the purchases by $10 billion in January. Last month the Fed trimmed another $10 billion from its February purchases.
     But last week's volatility in global financial markets, which led to the depreciation of the currencies of many emerging markets from capital outflows, raised speculation that the Fed could delay a further reduction in asset purchases.
    But Yellen said she expected U.S. economic activity to continue to expand at "a moderate pace."
    "We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do no pose a substantial risk to the U.S. economic outlook," she said.
    In addition to deciding to taper its asset purchases, the Fed in December also said it expected to maintain the target for its policy rate, the federal funds rate, at the current 0-0.25 percent, "well past the time" that the unemployment rate declines below 6.5 percent and inflation is no more than half a percentage point above its 2.0 percent long-run goal. Both thresholds were set by the FOMC in December 2012.
    With the U.S. employment rate falling to 6.6 percent in January, financial markets are starting to question just what the FOMC meant by "well past the time."
    "Crossing one of these thresholds will not automatically prompt an increase in the federal funds rate, but will instead indicate only that it had become appropriate for the Committee to consider whether the broader economic outlook would justify such an increase," Yellen told the House of Representatives' committee on financial services.
    Yellen acknowledged the fall in the U.S. unemployment rate but added that the recovery of the labor market was far from complete and remains well above the level that the Fed considers to be consistent with maximum employment.
     People without jobs for more than six months continue to make up an unusually large part of the unemployed and the number of people that are working part time but would prefer full time remains very high, she said.
    "These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market," Yellen said.



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