Yellen hints at more stimulus cuts
US Federal Reserve chairwoman Janet Yellen has said that if the economy keeps improving, the Fed will take "further measured steps" to reduce the support it is providing through monthly bond purchases.
In her first public comments since taking over the top Fed job last week, Ms Yellen said that she expects a "great deal of continuity" with her predecessor, Ben Bernanke.
She signalled that she supports Mr Bernanke's view that the US economy is strengthening enough to withstand a pullback in stimulus but that rates should stay low to further improve a still lacklustre economy.
Ms Yellen's remarks, prepared for a House committee she will address on Tuesday, suggest 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," Ms Yellen said, an indication that the Fed is in no hurry to boost short-term rates.
That message should be reassuring to investors.
In her remarks, Ms Yellen said the Fed is monitoring volatility in global markets but does not think it poses a serious risk to the United States at the current time.
"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," Ms Yellen said in her testimony for the House Financial Services Committee. "Still, there is more to do."
Ms Yellen, the first woman to lead the central bank in its 100 years, is delivering the Fed's twice-a-year report to Congress a week after being sworn in to succeed Mr Bernanke. He stepped down on January 31 after eight years as chairman.
Many economists think the Fed bond buying, which totalled 85 billion US dollars (£51.6 billion) a month during 2013, will be reduced in 10 billion dollar (£6.07 billion) increments this year until the purchases are eliminated in December.
After the two 10 billion dollar cuts in December and January, the level of bond buying stands at 65 billion dollars (£39.4 billion). The purchases of Treasury and mortgage bonds are aimed at stimulating the economy by keeping long-term borrowing rates low.
Ms 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% as long as inflation remains low. Many economists do not expect short-term rates to be increased until late 2015.
The unemployment rate in January fell to 6.6%, the lowest point in more than five years. Still, in her testimony, Ms 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 would prefer a full-time job remains very high."
In her testimony, she stuck closely to the positions taken by Mr Bernanke. She noted that she had served on the Fed's policy committee and worked with Mr Bernanke in developing the central bank's policies.
"I strongly support that strategy, which is designed to fulfil the Federal Reserve's statutory mandate of maximum employment and price stability," Ms Yellen said.
She said the Fed expects the economy to expand moderately this year, with unemployment continuing to fall and inflation moving up towards the Fed's 2% target.
Ms Yellen's testimony comes before she has presided over her first meeting as Fed chairwoman. That will occur on 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 four trillion dollar 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 had an outsize effect on financial markets. It has triggered concerns that many emerging market countries will not be able to withstand the withdrawal of foreign capital.
Investors have yanked money from emerging economies from Turkey to Argentina. They have done so in part because they fear that a pullback in the Fed's stimulus will send US interest rates up and draw investor money from overseas in search of higher returns.
The US stock market, which finished 2013 at record highs, has had a tough start to the new year. Investors have grown concerned about a string of tepid reports calling into question hopes that 2014 would be a turnaround year in which economic growth finally kicked into higher gear.
Ms Yellen's testimony came after a labour department jobs report on Friday showed that the economy added only 113,000 jobs in January after an even more disappointing 75,000 jobs were added in December.