Stimulus taper continues, Yellen

The stimulus taper continues, Janet Yellen, the new chair of the US Federal Reserve System insisted today before a House of Representative committee hearing.

Yellen added that if the US economy continues gaining ground the Fed will take further steps to scale down its support.

Interest rates will stay low, Yellen also indicated, in her first comments since taking over from Ben Bernanke.

Investors and economists have expressed concern over the last couple of weeks regarding volatility in financial markets and the exodus of capital from emerging economies in response the the Fed’s monthly reduction in its bond-buying stimulus program. Many wonder what will happen as the stimulus taper continues.

The Fed cannot be blamed for what happens abroad

Yellen acknowledged this recent volatility, but added that the Fed does not see a substantial risk to the US economic outlook. She added that the Fed’s policy is aimed at domestic economic issues and cannot be blamed for market volatility in other parts of the world.

Mrs Yellen told lawmakers today:

“We’ve been very clear at the outset that we initiated our program of asset purchases and an accommodative monetary policy more generally to pursue the goals that Congress has assigned to the Federal Reserve.”

“We’ve tried to be as clear as we possibly can as to how we would conduct this policy, and it’s been quite clear at the outset that as our recovery advanced we would wind down or reduce the pace of asset purchases.”

Yellen, a supporter of Bernanke’s approach

Seen as a strong supporter of Bernanke’s policies, Yellen today verbally expressed her backing for his approach.

Although unemployment has gone down in the United States, Yellen said that the job market recovery is “far from complete.” The unemployment rate is still well above what the central bank sees as consistent with maximum sustainable employment.

The Fed needs to consider other factors when deciding on its approach, and not just the unemployment rate, Yellen added.

Will the US economy lose steam this year?

Recent published data regarding the US economy has been mixed, and has raised concerns about whether the growing strength seen during the last two quarters of 2013 can be sustained throughout this year.

Over the last twelve months the unemployment rate has dropped from 7.9% to 6.6%. However, during December and January jobs growth has weakened.

Although significant progress has been made in restoring the American economy to health since the financial crisis, Yellen stressed “there is still more to do.”

The BBC quoted Tom Porcelli, chief US economist at RBC Capital Markets, New York, who said “It’s very obvious she is working from the same playbook as Bernanke, you will get a lot of continuity in policy.”

The bond-buying program is “not a preset course,” Yellen explained. Fed officials will base their approach regarding the pace of the program on the country’s economic outlook as well as how they assess the pros and cons of the program.

In December the fed cut the bond purchases from $85 billion per month to $75 billion, and implemented a further $10 billion cut in January. Their next meeting is on March 18th and 19th, and a further $10 billion cut is expected.

Equity markets and the dollar rose today after Yellen’s comments. The dollar recovered the ground it had lost against the euro and gained against the yen, but then weakened with comments on the US labor market.

On the other side of the pond, the Financial Times sees Yellen as a steady pair of hands, as it published an article with the headline “Stocks up as Yellen springs no surprises.”