U.S. economy isn’t out of the woods yet, Fed chair Janet Yellen says

Yellen delivered the Fed’s twice-a-year report on interest-rate policy and the economy Tuesday morning. After she finishes testifying before the banking committee Tuesday, she’ll speak Wednesday before the House financial services committee.

She delivered her first monetary report to Congress in February, just a week after being sworn in to succeed Ben Bernanke as the first woman to head the central bank.

6-year jobless low

While unemployment stood at 6.7 per cent in February, it has now fallen to 6.1 per cent, the lowest point since September 2008, reflecting strong job growth in recent months. The economy has created an average of more than 200,000 jobs a month over the past five months, the strongest stretch since the late 1990s.

Yellen said she expects the unemployment rate to continue to drift lower in the coming months, towards what she calls its “sustainable level.”

In recent comments, Yellen has stressed that while jobs are now being produced at a faster clip, the economy still needs the Fed’s help in the form of low interest rates because a variety of indicators, from measures of long-term unemployed to wage growth, still remain weak.

After several strong months of job growth and GDP gains, the banking committee pressed her for more detail on when, exactly, the Fed might see fit to raise rates from their historic lows. But Yellen wouldn’t bite, when asked to give a precise timeline on when we might see rates go higher.

“There’s no formula I can give you,” she said. “It will depend on the progress of the economy.” 

Most economists expect a rate hike some time in 2015 at the earliest, but a small minority think we could see a rate hike before that. An even smaller minority thinks the U.S. economy is still shaky enough that the Fed could delay raising rates until 2016 if not more.

The Fed’s twin goals are to promote maximum employment while keeping inflation under control.

QE3 will end soon

Lawmakers also looked for insights on how the Fed plans to unwind its massive holdings of Treasury bonds and mortgage-backed securities, which are approaching $4.5 trillion, more than four times the amount on the balance sheet when the financial crisis struck in the fall of 2008. The Fed’s bond purchases were aimed at keeping long-term interest rates low to give the economy a boost, one of the few tools at the Fed’s disposal of boosting the economy beyond cutting rates any more.

Minutes of the Fed’s June discussions released last week show that Fed officials are now in broad agreement that they will likely announce an end to their monthly bond-buying program in October with a final $15 billion reduction in the bond purchases.

The minutes showed that the Fed had a lengthy discussion on just how it planned to accomplish that reduction in its balance sheet. No final decisions were made, although officials expect to produce a plan before the end of this year.

The Fed has kept a key short-term interest rate at a record low near zero since December 2008. At its June meeting it kept language signaling that it plans to keep short-term rates low for a “considerable time” after the bond purchases end.

But the minutes showed there is a split between Fed officials who are still worried about low inflation and economic weakness and those concerned that the Fed may need to start raising interest rates more quickly than investors now expect.

What Next?

Recent Articles

Leave a Reply

You must be Logged in to post comment.