Yellen Testimony Signals Accommodative Policy and Low Rates to Continue

Fed Chair Janet Yellen is delivering her semiannual Monetary Policy Report in front of Congress on Tuesday. The testimony is before the Committee on Banking, Housing and Urban Affairs of the Senate. Her speech likely will be repeated in front of the House committee, and market watchers look more at answers in the Q&A session.

Yellen discussed the current economic situation and outlook, as well as monetary policy, closing with financial stability. Yellen’s opening remarks indicated that the economy is continuing to make progress toward the Federal Reserve’s objectives of maximum employment and price stability.

The financial stability area does contain key sector comments that are overvalued — coming soon in an expanded story.

Before you get too bogged down in details here, be sure to consider that Yellen’s stance is that she is in no hurry to raise interest rates. This also implies that the rate hike cycle will not be as drastic as rate hike cycles in the past. That is the belief as of now at any rate.

Yellen said on the labor market:

In the labor market, gains in total nonfarm payroll employment averaged about 230,000 per month over the first half of this year, a somewhat stronger pace than in 2013 and enough to bring the total increase in jobs during the economic recovery thus far to more than 9 million. The unemployment rate has fallen nearly 1-1/2 percentage points over the past year and stood at 6.1 percent in June, down about 4 percentage points from its peak. Broader measures of labor utilization have also registered notable improvements over the past year.

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Yellen said on gross domestic product:

Real gross domestic product is estimated to have declined sharply in the first quarter. The decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching. The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.

Yellen’s takeaway is that the economic recovery is not yet complete: unemployment remains above the Fed’s longer-run normal level, labor force participation is weaker than the unemployment rate indicates, and other indications show that significant slack remains in labor markets.

Yellen also addressed inflation. She said:

Inflation has moved up in recent months but remains below the FOMC’s 2 percent objective for inflation over the longer run. The personal consumption expenditures (PCE) price index increased 1.8 percent over the 12 months through May. Pressures on food and energy prices account for some of the increase in PCE price inflation. Core inflation, which excludes food and energy prices, rose 1.5 percent. Most Committee participants project that both total and core inflation will be between 1-1/2 and 1-3/4 percent for this year as a whole … we expect inflation to move back toward our 2 percent objective over coming years.

Another issue to consider is that Yellen and other Federal Open Market Committee participants continue to expect economic expansion at a moderate pace over the next several years. This will be supported by accommodative monetary policy and what she called a waning drag from fiscal policy.


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