November 14, 2013

Yellen: QE Will Continue, but Not ‘Forever’

'We have farther to go to regain the ground lost in the crisis and the recession,' Fed chief nominee told senators

Janet Yellen with President Obama and Fed Chairman Bernanke. (Photo: AP) Janet Yellen with President Obama and Fed Chairman Bernanke. (Photo: AP)

While the economy “is significantly stronger and continues to improve” since the 2008 financial crisis, the Fed plans to continue its asset purchase program known as quantitative easing as “the benefits exceed the costs,” but the program “cannot continue forever,” Janet Yellen, vice chairwoman of the Federal Reserve Board, said Thursday during her confirmation hearing before the Senate Banking Committee.

Yellen, who’s widely expected to replace current Fed Chairman Ben Bernanke, said that the private sector has created 7.8 million jobs since the postcrisis low for employment in 2010. Housing, she said, “which was at the center of the crisis, seems to have turned a corner—with construction, home prices and sales up significantly.” The auto industry, too, “has made an impressive comeback, with domestic production and sales back to near their precrisis levels.”

While the nation’s economy has “made good progress,” Yellen said, “we have farther to go to regain the ground lost in the crisis and the recession.” Unemployment, which is down from a peak of 10% and was 7.3% in October, “is still too high, reflecting a labor market and economy performing far short of their potential.”

Unemployment remains high, Yellen said, with 36% of those who are unemployed having been out of a job for more than six months.

At the same time, Yellen said, inflation has been running below the Federal Reserve’s goal of 2% “and is expected to continue to do so for some time.”

When asked during her testimony if there were dangers in tapering asset purchases too early, Yellen said that there were “dangers” in ending the program too early as well as in “continuing it too long.”

Said Yellen: “It’s important not to remove support when the economy is fragile.”

The Federal Reserve, she said, is using its “monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

Michael Hanson, senior U.S. economist for Bank of America Merrill Lynch, noted in his Thursday Economic Watch report that Yellen’s aforementioned comment on reducing “monetary accommodation” typically has meant rate hikes in official Fed communication, while reducing “reliance on unconventional tools” likely refers to the eventual reduction in the size of the Fed’s balance sheet rather than tapering.

Said Hanson: “Recall, most Fed officials take a ‘stock approach’ to QE; in that view it’s the total amount of assets owned and not the purchase pace that defines the degree of accommodation.”

Sen. Elizabeth Warren, D-Mass., asked Yellen if she would ensure the Fed would focus on its supervisory and regulatory responsibilities just as much as it does on its monetary policy.

Yellen responded that the Fed needs to take its supervisory and regulatory duties “just as seriously and devote just as much time” to them as its monetary policy.

In her prepared testimony, Yellen said she’s “committed to using the Fed’s supervisory and regulatory role to reduce the threat of another financial crisis. I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as ‘too big to fail.’”

Sen. Charles Schumer, D-N.Y., asked Yellen what the Fed could do to stem the decline in middle-class incomes, which he said was a “very serious” problem. Middle-class incomes declined 10% between 2001 and today, Schumer said.

Yellen agreed that it was a “very serious problem,” but noted that it was not a new one. The problem “goes back to the '80s when there was a huge rise in income inequality with middle-income [workers] losing disproportionately,” Yellen said.

She said lots of research and debating has been done on the causes for the decline, with contributors being globalization, technological changes and the decline of unions. However, she said, “the Fed can’t change all of those trends; the solutions involve a multitude of things like job training and education.” The most effective measure the Fed can take, she added, is to “try to create robust recovery.”

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Check out El-Erian: 5 Things to Look for in Yellen Testimony on ThinkAdvisor.

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