Going before Congress for the first time as the chair of the Federal Reserve, Janet Yellen promised Tuesday continuity with her predecessor, shrugged off the threat of rising financial volatility in developing nations and warned she’ll look beyond the labor market to decide when to begin raising interest rates.
Yellen appeared before the House Financial Services Committee to deliver the Fed’s semi-annual monetary policy report. In her opening remarks, she said she wouldn’t part ways with the policies of Ben Bernanke since she helped shape them. And she pronounced herself confident that growing turmoil in economies such as Turkey and Argentina, and street protests in Brazil, will not grow into a global problem.
“Our sense is at this stage, these developments do not pose a substantial risk to the U.S. economic outlook,” she said. “We will, of course, continue to monitor the situation.”
On the Fed’s controversial bond buying program, which has been tapered back in January and February, Yellen expected to continue lowering the amount of such asset purchases throughout the year. She also emphasized that the Fed’s benchmark federal funds rate, which influences borrowing costs across the economy, is likely to remain at its current range of near zero well after the bond purchases have ended.
Yellen also clarified that an earlier signpost for raising rates_ the unemployment rate falls below 6.6 percent_ is no longer the threshold for action, “especially if projected inflation continues to run below the 2 percent goal.”
Translation: Deflation, or the decline in prices across the economy, remains a lurking threat and the unusual situation remains that the Fed actually wants a bit more of inflation.
The hearing itself was unusual in that traditionally, though not always, the Fed chief alone testifies. But Chairman Jeb Hensarling, R-Texas, called a subsequent panel to effectively rebut her testimony. It included John Taylor, a longtime Treasury official, conservative scholar and critic of the Fed’s bond purchases, designed to stimulate the economy.
One of the Fed’s chief goals is not only to contain inflation to a range between 1-2 percent, but to also anchor expectations about future inflation. If that becomes untethered, it could lead investors to demand higher returns, fearing their profits in dollars would have diminished purchasing power.
Yellen is the first chair appointed by a Democratic president since the 1980’s, as Greenspan and Bernanke were Republicans appointed by a Republican president and reappointed by a Democratic one. A former professor at the University of California-Berkeley, a liberal bastion, Yellen faced decidedly harsher questioning from the Republican-led committee than what her predecessor faced in his early years.
“You face the daunting prospect of … a Fed balance sheet the size and composition of which we have never seen before,” Hensarling told Yellen in stern opening remarks, adding that he supports efforts to further audit the Fed and “independence and accountability are not mutually exclusive concepts.”
Many Republicans have criticized the Fed’s efforts to stimulate the economy, suggesting that it has distorted financial markets and done little to boost sluggish growth. Many GOP members asked technical questions concerning pending rules on banks, and there were few questions on the economy and monetary policy. But when pressed by Hensarling on why growth has been so sluggish, Yellen reminded that “these are very unusual times” that required creative approaches since the main tool, low interest rates, cannot go lower than zero.
CORRECTION: An earlier version of this story incorrectly said that other Fed chairmen were not followed by panels weighing their testimony. It did happen occasionally under a past committee chairman, then-Rep. Barney Frank, D-Mass.