Fed chair Janet Yellen promises 'continuity,' further stimulus reduction

U.S. Federal Reserve chairwoman Janet Yellen sought Tuesday to reassure investors that she will embrace the approach to interest-rate policy that her predecessor, Ben Bernanke, pursued before he stepped down as chairman last month.

Yellen told a House of Representatives financial services committee that if the economy keeps improving, the Fed will take "further measured steps" to reduce the support it's providing through monthly bond purchases.

In her first public comments since taking over the top Fed job last week, Yellen said she expects a "great deal of continuity" with Bernanke. She signalled that she supports his view that the economy is strengthening enough to withstand a pullback in stimulus but that rates should stay low to further improve a still-lacklustre economy.

Yellen's remarks, her first public address as Fed chair, suggested that the Fed will keep its key short-term rate near zero for a prolonged period.

"The recovery in the labour market is far from complete," Yellen said, an indication that the Fed is in no hurry to boost short-term rates.

Markets respond positively

Her message of continuity at the Fed was a reassuring one for investors, and it contributed to a rally on Wall Street. The Dow Jones industrial average was up nearly 140 points shortly after noon eastern time.

Yellen said the Fed is monitoring volatility in global markets but doesn't think it poses a serious risk to the United States at the current time.

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"Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and strengthening the financial system," Yellen said. "Still, there is more to do."

Some Republican lawmakers expressed concern to Yellen that the Fed's extraordinary support could eventually ignite high inflation or destabilize financial markets.

The committee chairman, Republican Jeb Hensarling of Texas, a critic of the Fed, said there were "clearly limits to what monetary policy can achieve." Hensarling questioned whether the Fed had sent confusing signals to investors by changing its possible timetable for future actions on interest rates.

Yellen, the first woman to lead the central bank in its 100 years, delivered the Fed's twice-a-year report before the House panel a week after being sworn in to succeed Bernanke. He stepped down Jan. 31 after eight years as chairman.

Weak job growth might not signal slowdown

Many economists think the Fed bond buying, which totalled $85 billion US a month during 2013, will be reduced in $10 billion increments this year until the purchases are eliminated in December. The purchases of Treasury and mortgage bonds are aimed at stimulating the economy by keeping long-term borrowing rates low.

The Fed announced the first clawback of the program in December and has since reduced the stimulus a second time to $65 billion a month.

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Democratic Congresswoman Carolyn Maloney of New York sought to have Yellen outline what developments might cause the Fed to slow or suspend its reductions in bond purchases. Maloney asked whether the weak jobs report for December and January might prompt such a pause.

Yellen acknowledged that she was surprised by the sluggish job gains the past two months. But she cautioned against "jumping to conclusions." She suggested that job growth might have been held down by severe weather and was not necessarily a signal of a hiring slowdown. She noted that when the Fed next meets to consider interest rates on March 18-19, it will have another employment report to review.

Yellen said the committee won't likely change its pace of bond reductions unless it sees a "notable change" in the economic outlook. The Fed is forecasting that the economy and the job market will continue to strengthen in 2014.

Rate increase not expected until 2015

On bank regulation, Yellen said the Fed was committed to implementing the 2010 Dodd-Frank Act, which overhauls regulation to try to prevent a future financial crisis. But she agreed in response to questions that bank oversight that's too aggressive can keep banks from making loans that small businesses need to operate.

Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed.- Janet Yellen, chairwoman of the U.S. Federal Reserve

Yellen repeated the Fed's assurances that it intends to keep its key short-term rate near zero "well past" the time the unemployment rate drops below 6.5 per cent as long as inflation remains low. Many economists don't expect short-term rates to be increased until late 2015.

The unemployment rate in January fell to 6.6 per cent, the lowest point in more than five years. Still, in her testimony, Yellen said unemployment remained "well above levels" that Fed officials think are consistent with its goal of maximum employment. She said the job market still faces problems.

"Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed," she said. "The number of people working part time but who would prefer a full-time job remains very high."

Will preside over 1st Fed meeting in March

In her testimony, she stuck closely to the positions taken by Bernanke. She said the Fed expects the economy to expand moderately this year, with unemployment continuing to fall and inflation moving up toward the Fed's two per cent target.

Yellen's testimony came before she had had presided over her first meeting as Fed chair. That will occur March 18-19, after which she will hold her first news conference.

The Fed's three rounds of bond purchases have driven its holdings above the $4 trillion mark — four times its level before the financial crisis struck with force in 2008.

The prospect of a continued pullback of the Fed's bond purchases has triggered concerns that many emerging market countries won't be able to withstand a withdrawal of foreign capital. Investors have yanked money from emerging economies in part because they fear that a pullback in the Fed's stimulus will send U.S. interest rates up and draw investor money from overseas in search of higher returns.