WASHINGTON – Federal Reserve Chair Janet Yellen said Wednesday that the U.S. economy is improving but noted that the job market remains “far from satisfactory” and inflation is still below the Fed’s target rate.
Speaking to Congress’ Joint Economic Committee, Yellen said that as a result, she expects low borrowing rates will continue to be needed for a “considerable time.”
Yellen’s comments echo earlier signals that the Fed has no intention of acting soon to raise its key target for short-term interest rates even though the job market has strengthened and economic growth is poised to rebound this year. The Fed has kept short-term rates at a record low near zero since December 2008.
At the same time, Yellen cautioned that geopolitical tensions, a renewal of financial stress in emerging markets and a faltering housing recovery pose potential threats.
In response to a question, Yellen described rising income disparities in the United States as a “very worrisome trend” that could undercut economic stability and democratic principles. But she cautioned that “it’s hard to get clear evidence” that pay or wealth disparities have slowed economic growth.
Sen. Roger Wicker, R-Mississippi, argued that the Fed’s own policies had helped widen the wealth gap in the United States: The Fed-engineered low rates, intended to fuel the economy, have boosted stock prices and wealth for the richest Americans, Wicker contended.
Yellen countered that low rates had strengthened overall economic growth and helped home prices recover from the housing bust, thereby helping ordinary households.
Rep. Kevin Brady, R-Texas, the committee chairman, pressed Yellen to specify when the Fed might start raising short-term rates and how it will act to pare its record holdings of Treasury and mortgage bonds.
Yellen said she couldn’t give a date. But she said the Fed expects to begin raising rates when it sees enough progress in restoring full employment and when inflation has returned to its target of 2 per cent.
She pointed to the Fed’s latest quarterly economic forecasts, which showed that most members expect the Fed to begin raising short-term rates in 2015 or 2016.
Yellen noted that even when the Fed’s bond purchases end, it intends to maintain its high level of holdings and will begin to reduce them only when the economy can withstand the pullback. The Fed’s record investment portfolio exceeds $4 trillion.
But Yellen also stressed that the Fed wants to avoid past mistakes of keeping its policies loose for too long and thereby fueling inflation. She noted the prolonged bout of high inflation of the 1970s.
“The lessons of that period are very real to all of us, and none of us want to make that mistake again,” Yellen said.
Yellen’s testimony marked her first chance to discuss the economy since the Fed met last week and the government said Friday that the economy added 288,000 jobs in April, the biggest hiring surge in two years. The unemployment rate dropped to 6.3 per cent, its lowest point since 2008, from 6.7 per cent in March.
But the unemployment rate fell that far because many fewer people began looking for work in April, thereby reducing the number of unemployed. The proportion of Americans who either have a job or are looking for one has reached a three-decade low.
On Wednesday, Yellen cautioned that the share of the unemployed who have been out of work for more than six months and the number of people working part time who would prefer a full-time job were at historic highs.
She also said weak wage gains are a signal of a subpar job market.
Still, at last week’s Fed meeting, the central bank indicated that it saw signs of a strengthening economy. It approved a fourth $10 billion reduction in its monthly bond purchases to $45 billion, down from an original $85 billion. The Fed has been buying bonds to try to keep long-term rates low.
The Fed is expected to end its bond purchases by year’s end. But even when it does, the Fed will maintain its holdings at a record level above $4 trillion and provide continued downward pressure on long-term rates.
Last week, the Fed reiterated its expectation that short-term rates would remain near zero for a “considerable time” after the bond buying program ends. Yellen repeated that language Wednesday.
“Many Americans who want a job are still unemployed, inflation continues to run below (the Fed’s) longer-run objectives and work remains to further strengthen our financial system,” she said.
In a speech last month, Yellen had stressed the need for the Fed to remain flexible in deciding how to manage interest rates. She said that it was important to be able to respond to “significant unexpected twists and turns the economy may make.”
Many Republicans have expressed concerns that the Fed’s low-rate programs are raising the risks of financial market instability and high inflation in the future.
Addressing those concerns, Yellen said the Fed recognized that an extended period of low rates could foster risky behaviour in which bond investors “reach for yield” and thereby take on greater risks.
She said there was some evidence that this was occurring in the market for junk bonds where “underwriting standards have loosened.” But she said the risks so far appears “modest.”
AP Economics Writer Josh Boak contributed to this report.