Janet Yellen’s testimony
On Thursday, February 27, Janet Yellen appeared for the second part of the Fed Chair’s semi-annual testimony before Congress after it had been re-scheduled from two weeks earlier due to a winter storm. She discussed issues relating to monetary policy and the health of the general economy. Yellen reiterated the Fed’s stance made in Part I of the testimony on February 11, that the central bank intends to reduce asset purchases at a “measured” pace. But she said, “If there’s a significant change in the outlook, certainly we would be open to reconsidering.”
The Fed stance on Tapering
The S&P 500 increased to 1,854.29—an all-time high—on February 27, 2014, on Federal Reserve Chair Janet Yellen’s testimony to the Senate Banking Committee, which reiterated that the Fed’s commitment to the taper was unchanged and would gauge the impact of poor weather on recent disappointing economic data before modifying the pace of asset purchases. She said that the Federal Open Market Committee (or FOMC) would consider this issue at its meeting in March.
“Since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point it is difficult to discern how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”
Earlier last year, the Fed had stated that it would maintain the Fed funds rate at 0% to 0.25% until unemployment showed signs of dropping below a 6.5% threshold. The unemployment rate came down to 6.6% last January—faster than expected, in part due to a drop in the participation rate or the percent of the population working or looking for work. This means that some people have lost motivation and are no longer trying to get a job. “Of course, the unemployment rate is not a sufficient statistic to measure the health of the labor market,” Yellen said in her testimony, claiming that the Fed would take other labor market indicators into account before looking at monetary tightening.
On the Fed funds rate
The Fed funds rate is currently at 0.25%. “Lowering that rate… would have very limited effect on bank lending,” Yellen said, opining that this would not stimulate additional lending and could disrupt money market activities.
To learn about another key national indicator, move on to Part 3 of this series.