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Yellen Says Recovery in Labor Market Is 'Far From Complete'

February 11, 2014
Bloomberg
Joshua Zumbrun

Federal Reserve ChairmanJanet Yellen said more work is needed to restore the labor market to health and pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps.”

While growth has picked up, “the recovery in the labor market is far from complete,” Yellen said today in the text of remarks to the House Financial Services Committee. “I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level.”

Yellen, 67, delivered her first public remarks as Fed chairman as policy makers pursue plans to gradually scale back the unprecedented bond-purchase program she helped put in place. She repeated the Fed’s outlook for further reductions in asset purchases and said they are not on a “pre-set course.”

Treasuries fell and stock futures remained higher. The contract on the Standard & Poor’s 500 Index expiring in March was up 0.2 percent to 1,797.40 at 9:06 a.m. in New York. The yield on the 10-year note rose three basis points, or 0.03 percentage point, to 2.7 percent.

She spoke days after a government report showed the jobless rate unexpectedly declined almost to the Fed’s threshold for considering an increase in the benchmark interest rate, even as payrolls growth was weaker than forecast.

Yellen said the unemployment rate alone isn’t an adequate gauge of labor-market health.

Long-Term Unemployed

“Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high,” she said. “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

Yellen also said that the Fed has been “watching closely” volatility in global financial markets and that “our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”

Yellen used her testimony to praise her predecessor, Ben S. Bernanke, for helping “make our economy and financial system stronger” and said she’d continue his strategy.

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” Yellen said. She said she served on the Federal Open Market Committee “as we formulated our current policy strategy and I strongly support that strategy.”

Monthly Pace

The Fed said in December that it would start reducing the monthly pace of asset purchases, citing progress toward its goal of full employment. It announced a $10 billion reduction that month, followed by a cut of the same size in January, to $65 billion.

The central bank has said it will keep buying bonds until the outlook for the labor market has “improved substantially.”

Fed policy makers have also sought to reassure investors that while they are tapering bond purchases, they still intend to hold the Fed’s target rate near a record low.

Beginning in December 2012, the FOMC said it would keep the rate near zero “at least as long” as unemployment was above 6.5 percent. At their December 2013 meeting, it strengthened that statement, saying the rate is likely to stay near zero until “well past the time” unemployment falls below 6.5 percent, a strategy Yellen repeated today.

Unemployment in January fell to 6.6 percent, the lowest since October 2008, from 6.7 percent, a Labor Department report showed last week. Job growth in December and January was the weakest of any two-month period in the past three years.

Unemployment Rate

Joblessness has fallen faster than policy makers expected. When they first announced the threshold, most of them expected a rate of 7.4 percent to 7.7 percent at the end of 2013 and 6.8 percent to 7.3 percent at the end of this year.

“They thought if the rate fell to this level you’d be seeing a lot more job growth and economic growth,” said Stephen Stanley, chief economist at Pierpont Securities LLC in StamfordConnecticut, and a former Richmond Fed economist. “The Fed is viewing the totality of data as suggesting the labor market is not as healthy as they thought it would be when we got to that 6.5 percent threshold.”

The FOMC doesn’t meet again until March 18-19. By then, it will have an additional month of economic data, including the jobs report for February.

Balance Sheet

Yellen took over as Fed chairman on Feb. 3 after serving for three years as Bernanke’s deputy. She has supported the bond purchases that expanded the Fed’s balance sheet to a record $4.1 trillion, and she helped craft a communications strategy designed to shape expectations for the future path of interest rates.

Bernanke said in a press conference in December that he had “always consulted closely with Janet, even well before she was named by the president.” He said she “fully supports” the central bank’s decision to cut asset purchases.

While she was vice chairman, Yellen also led a communications subcommittee that formalized the Fed’s goals for inflation and unemployment. The Fed now aims for inflation of 2 percent over the longer run. It has been undershooting that goal: the Fed’s preferred gauge of consumer prices climbed 1.1 percent last year.

Yellen hasn’t given detailed comments on the outlook for monetary policy and the economy since April, aside from her confirmation hearing in November. Outside of the confirmation process, Yellen hasn’t testified before Congress as a central bank official since July 1996, when she was a Fed governor appointed by President Bill Clinton.

Target Rate

The Fed has held its target interest rate near zero since December 2008 and engaged in three rounds of bond buying. The easing policies helped push the Standard & Poor’s 500 Index up as much as 173 percent from a 12-year low in 2009.

The index is down 2.6 percent this year, driven lower by turmoil inemerging markets and speculation about the direction of Fed policy. The MSCI Emerging Markets Index has lost 6.7 percent this year through yesterday.

Led by Reserve Bank of India Governor Raghuram Rajan, policy makers in emerging markets have complained that the Fed and other major central banks are fanning turmoil by failing to account for the impact of their policies on other countries.

The Board of Governor’s Monetary Policy Report included a report on emerging markets that have turned more volatile in response to the Fed’s tapering of quantitative easing and local events. The Fed Board’s analysis said there were signs that investors were distinguishing between the economies.

Emerging Markets

“Investors appear to have been differentiating among” emerging market economies “based on their economic vulnerabilities,” according to a Monetary Policy Report presented to the House committee.

The Fed report included a vulnerability index, and said “Brazil, India,IndonesiaSouth Africa, and Turkey are among the economies that appear to have been the most affected” by the sell-off.

Still, thanks to policy improvements following the crises of the 1990s, such as more flexible exchange rates and lower inflation, “the degree of vulnerability across economies appears to be materially lower compared with past episodes.”

While recent gauges of U.S. manufacturing and the labor market have shown weakness, economists forecast a pickup in growth this year. Gross domestic product is likely to expand 2.8 percent, according to the median forecast of economists surveyed by Bloomberg, following growth of 1.9 percent in 2013.

Visa Inc., American Express Co., Discover Financial Services and MasterCard Inc. all reported improved profits going into 2014 as customers used credit and debit cards to make purchases.

The economy is showing momentum, MasterCard Chief Executive Officer Ajay Banga said on a Jan. 31 earnings call. “I don’t see the U.S. as being slowing in any way,” Banga said. “I see it improving.”

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