Yellen signals more bond purchases until recovery improves

Source: Bloomberg Source: Bloomberg

Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen said in testimony for her nomination hearing before the Senate Banking Committee today in Washington. “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

Yellen, the Fed’s vice chairman, voiced her commitment to using bond purchases known as quantitative easing to boost growth and lower unemployment that remains above 7% more than four years after the economy began to recover from the deepest recession since the Great Depression.

“Her approach is, ‘Let’s do more QE now to get the job done faster,’ ” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the New York Fed. “Yellen is repeating her commitment to getting the job done.”

In three pages of prepared remarks for the 10 a.m. hearing, released yesterday, Yellen, 67, said unemployment is “still too high, reflecting a labor market and economy performing far short of their potential,” and that inflation is expected to remain below the Fed’s 2% goal. She also highlighted areas where the economy has improved, saying housing “seems to have turned a corner” and the auto industry has made an “impressive comeback.”

‘Inflation Hawk’

Treasury 10-year yields rose one basis point, or 0.01 percentage point, to 2.73% as of 10:11 a.m. in New York. The benchmark yield slid seven basis points yesterday, the biggest one-day drop since Oct. 22.

Because inflation is low today, a policy maker “can be an inflation hawk and be in favor of policy accommodation at the same time,” said Lou Crandall, chief economist at Wrightson ICAP LLC, a research firm in Jersey City, New Jersey.

“I expect to learn more about her style than anything substantive” under questioning today from senators, Crandall said. “As far as specifics, she doesn’t want to antagonize those who would vote against her.”

Yellen’s testimony comes at a critical moment for monetary policy. The Federal Open Market Committee she is poised to lead is considering whether to begin slowing its $85 billion monthly bond-purchase program, which is pushing the Fed’s assets toward a record $4 trillion. The Fed has kept its target interest rate near zero since December 2008.

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