By Judith Ugwumadu | 12 February 2014
New US Federal Reserve chair Janet Yellen used her first economic address yesterday to reassure Congress that there will be no sudden changes in its monetary policy. But she said more needed to be done to restore the economy back to health.
Yellen anticipated that the US economy and employment rate would grow at a ‘moderate pace’ this year and next, and highlighted the need to consider more than just the labour market when judging economic progress.
She said the pick-up in economic activity had fuelled further progress in the labour market. The unemployment rate had fallen by nearly a percentage point since June last year and between 1 and 0.5 percentage points since the beginning of the current asset purchase program.
‘Nevertheless, the recovery in the labour market is far from complete,’ she pointed out.
Yellen said the central bank would continue with its current asset purchase programme despite ongoing improvements in labour market conditions and inflation moving back towards 2% over the coming years.
‘Let me emphasise that I expect a great deal of continuity in the Federal Open Market Committee’s approach to monetary policy,’ Yellen said in the central banks’ Monetary Policy Report.
‘I served on the committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfil the Federal Reserve’s statutory mandate of maximum employment and price stability.’
In January, under Yellen’s predecessor Ben Bernanke, the Fed began tapering its quantitative easing programme, reducing monthly asset purchases by $10bn to $75bn. Yellen revealed that there would ‘likely be a [reduction in] the pace of asset purchases in further measured steps at future meetings,’ if labour market data ‘broadly supports’ the Fed’s expectation that unemployment will improve.
However, she made it clear that the tapering was ‘not on a preset course’.
In its forward guidance, the Fed said it will not consider raising its near-zero interest rate until the unemployment rate falls from its current level of 7% to 6.5% and as long as inflation expectations remain below 2.5%.
Yellen noted that both the asset purchase programme and forward guidance put downward pressure on longer-term interest rates and supported asset prices.
‘In turn, these more accommodative financial conditions support consumer spending business investment, and housing construction, adding impetus to the recovery,’ she said.
‘Since the financial crisis and the depths of recession, substantial progress has been made in restoring the economy to health and in strengthening the financial system.
‘Still, there is more to do. Americans remain unemployed, inflation remains below our longer-run objective, and the work of making the financial system more robust has not yet been completed.’
