Yellen: Recovery Incomplete, Loose-Money Policy Justified

Susan Walsh/APFederal Reserve Chair Janet Yellen
By Howard Schneider and Michael Flaherty

WASHINGTON -- The U.S. economic recovery remains incomplete, with a still-ailing job market and stagnant wages justifying loose monetary policy for the foreseeable future, Federal Reserve Chair Janet Yellen told a Senate committee Tuesday.

In a strong defense of the central bank's current stance, Yellen said early signs of a pickup in inflation aren't enough for the Fed to accelerate its plans for raising interest rates, a move currently expected in the middle of next year.

That could change, with interest rates rising sooner and faster, if data show labor markets improving more quickly than expected, she said.

But as it stands, "although the economy continues to improve, the recovery is not yet complete," Yellen said in semi-annual testimony before the Senate Banking Committee, repeating her focus on lagging labor force participation and weak wage growth as key to any conclusions about the economy's health.

"Too many Americans remain unemployed," Yellen said.

U.S. stock markets dropped slightly after the release of Yellen's testimony and an accompanying monetary policy report, with shares of biotechnology and social media stocks being particularly hard hit after being singled out in the report for their "stretched" valuations.

"These are the sub-industries that have caused a lot of longtime stock watchers to scratch their heads. These companies have relative few earnings, especially in the biotech area," said Kim Forrest, senior equity research analyst with Fort Pitt Capital Group in Pittsburgh.

"I hope she [Yellen] is not surprised by what the market is doing. I'd say she'd like to deflate these bubbles with a little bit of stock talk."

In general, however, the report said current asset and security prices remain in line with "historic norms."

Fed Relatively Upbeat

Yellen presented a broad overview of an economy still in transition from the 2007-2009 economic crisis. In the accompanying report, the Fed said its balance sheet would top out at $4.5 trillion when its bond-buying program ends in October, a sign of how much stimulus the central bank has had to unleash to support the economy.

With another $2.6 trillion held in reserve by banks, the report said it "will not be feasible" for the Fed to rely on the traditional Fed Funds market to manage interest rates -- a judgment implicit in its recent work on new interest rate tools.

Yellen said the economy continues to generate jobs and steady growth, but she added that Fed policymakers currently expect their preferred measure of inflation to stand at between 1.5 percent and 1.75 percent for 2014, short of the central bank's 2 percent target.

The housing market remains weak, Yellen said, and business investment less than hoped.

Fed chiefs are mandated by law to report to Congress twice a year on monetary policy, and the hearing Tuesday was Yellen's second such appearance. Her first turned into a marathon grilling about her philosophy and views of the economy.

The Fed faces a complex agenda as it weans the U.S. economy from the massive stimulus programs put in place to fight the financial crisis.

Economic data has kept Fed policymakers relatively upbeat that the economy will make steady progress towards the central bank's goals.

But there is also the potential for serious division.

Some policymakers worry the Fed is falling behind the curve on rate hikes and that Yellen is taking too much of an impromptu approach to the interest rate decision.

In her prepared testimony, she held firm to her view that low labor force participation and other labor market statistics are evidence of slack that needs to be absorbed by stronger job growth, not just a sign of unavoidable demographic change.

For now, a more dovish approach holds sway at the central bank, with several officials saying they'd tolerate inflation higher than the 2 percent target for a period of time in order to ensure growth is on track, wages are rising, and as many workers as possible have been drawn back into jobs.

Responding to questions from committee members, she said it would be a "mistake" for the Fed to adopt a strict rule for raising interest rates, something advocated by some lawmakers and Fed officials.

-Additional reporting by Rodrigo Campos in New York.

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Yellen seems a litle to liberal for me. What happens when we have another ression and intrest ratre are still at zero? I guess it will be back to the QE s again (printing more money out of thin air !

July 15 2014 at 4:20 PM Report abuse -3 rate up rate down Reply

The Fed has been saying (since 2009) that the economy would "improve in the second half of the year". For five years, this has failed to happen.

Where are the signs of an "improved economy"??? There is no increase in wages or salaries for the average working person, no increase in the labor participation rate, no surplus of good-paying jobs (just more low-paying part time service jobs), and no relief in sight for the soaring prices of food, fuel, housing, and transportation and other basic needs.

The Fed didn't see the Tech Crash of 2000 coming, it didn't see the Housing crash coming, and (worst of all) it didn't see the 2008 Stock Market and economy crash coming. Now, it doesn't see the giant bubble in student loan debt, it doesn't see the second housing bubble inflating, and (incredibly) it doesn't see the runaway inflation we already have. Instead, the Fed insists that inflation is "only 1.5%".

What good are these people?? They are worse than useless. They are sitting back, debating "when" we "might" see economic improvement while the country is going down the tubes.

Did anyone see the photos of Yellen testifying before Congress, recently?? Sitting there with a blank expression on her face and her mouth gaping open. She has NO idea what to do or how to fix the mess the Fed has created.

This whole situation is a national disgrace.

July 15 2014 at 4:11 PM Report abuse rate up rate down Reply

Hmmmm........I wasn't even aware that the recovery began.

July 15 2014 at 1:22 PM Report abuse -1 rate up rate down Reply
1 reply to rgkarasiewicz's comment

Not everyone is a loser like you. The rest of us have benefitted by a market that has gone from 6800 to 17,000 since 2009. You shouldn't have sold at the bottom.

July 15 2014 at 1:40 PM Report abuse -3 rate up rate down Reply
2 replies to chris1011's comment

Well, perhaps I'm unable to see things as clearly as you can, but it sure seems to me that we were 'tricked' (50 million on bread lines-aka "food stamps" and impoverished, 26.0% unemployment rate-Shadow Statistics, 9.8% consumer inflation rate-Shadow Statistics, etc. etc. etc.) rather than 'treated' (billionaires, the big banks, and multi-national corporations).

July 15 2014 at 3:55 PM Report abuse -1 rate up rate down

Yeah, you were tricked alright, in 2012 when you voted in a whole slew of T-baggers who did nothing but throw sand in the gears, shut down the government which wasted billions, got nothing done except enacted legislation to probe women's private parts. Tried to repeal the ACA instead of hunkering down to help improve it. 50 times they tried, well maybe on the 51st try they'll succeed.

You really thought the Baggers were gonna fix things, but the joke's on you. They don't believe in effective government, so how in heck can they ever govern effectively is beyond reason. Put 'em back in this year and see if anything improves. Bet it won't for guys like you. I'll be laughing all the way to the bank - thank you very much.

July 15 2014 at 6:40 PM Report abuse -4 rate up rate down

Yellen: Recovery Failed, more money to be created out of thin air!

July 15 2014 at 11:37 AM Report abuse +1 rate up rate down Reply