Yellen Says Fed to Keep Taper as It Parses Weather-Weakened DataCraig Torres and Rich Miller
Federal Reserve Chair Janet Yellen said the central bank is likely to keep trimming asset purchases, even as policy makers monitor data to determine if recent weakness in the economy is temporary.
“Unseasonably cold weather has played some role,” she said in response to a question today from the Senate Banking Committee. “What we need to do, and will be doing in the weeks ahead, is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”
Yellen also signaled the Fed is moving away from its numerical threshold linking any decision to raise its benchmark interest rate to the level of unemployment. Her appearance before the Senate panel, delayed by a snowstorm in Washington, follows reports indicating that harsh weather contributed to weakness in retail sales, manufacturing and housing.
Yellen repeated the Fed’s statements that the central bank intends to reduce asset purchases at a “measured” pace, and she said in response to a separate question that the bond-buying program is likely to end in the fall. At the same time, “if there’s a significant change in the outlook, certainly we would be open to reconsidering,” she said.
“The Fed is seriously trying to discern how much of the slowdown we have seen is related to weather,” said Dana Saporta, director of U.S. economic research at Credit Suisse in New York. Unless the Federal Open Market Committee “is forced to change its outlook significantly, it is unlikely to change the pace of the taper at $10 billion” when officials next meet March 18-19.
Saporta said it is “remarkable” how most forecasters, including Fed officials, are looking past weak first-quarter data toward stronger growth later in the year. Credit Suisse forecasts a 3 percent pace of expansion in the second half of 2014, in line with the median estimate of economists surveyed by Bloomberg News. The economy will probably expand at a 2.1 percent pace in the first quarter, according to the survey.
Stocks advanced after Yellen’s testimony, pushing the Standard & Poor’s 500 Index up 0.5 percent in New York to 1,854.29, above its closing record of 1,848.38 reached Jan. 15.
A government report today indicated manufacturers may be shaking off the effects of poor weather. Orders for U.S. durable goods excluding the volatile transportation category unexpectedly climbed in January by the most in eight months, data from the Commerce Department showed.
Senators sought to draw out Yellen on a range of issues, some of them topics of heated partisan debate.
Asked about a Congressional Budget Office report saying that President Barack Obama’s proposal to raise the minimum wage would lead to the loss of as many as 500,000 jobs, Yellen said the “CBO is as qualified as anyone to evaluate that literature, and I wouldn’t argue with their assessment.”
Yellen said “almost all economists” cite two effects of the minimum wage: it increases the incomes workers with low wages while also reducing employment.
Jason Furman, chairman of the White House Council of Economic Advisers, has taken issue with the CBO’s findings, saying they don’t reflect the consensus view of economists.
Yellen repeated the Fed’s pledge to keep the benchmark interest rate near zero at least as long as unemployment stays above 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
At the same time, she indicated the Fed is moving in the direction of providing investors with qualitative guidance on its interest-rate intentions in place of the quantitative thresholds it put in place in December 2012.
She said she agreed with many members of the FOMC that the central bank needs to consider a broad range of indicators in setting policy now that unemployment is closing in on the Fed’s 6.5 percent marker.
That “moves in the direction of qualitative guidance,” Yellen said, adding, “On the other hand, we do want to give markets as much of an indication of how we expect to conduct policy as we can.”
U.S. policy makers already have de-emphasized the significance of the 6.5 percent threshold. In December, they added language in the statement that they expect to hold the overnight federal funds rate near zero “well past the time” that unemployment falls below that level, especially if inflation stays low.
“I guess this is qualitative guidance,” Yellen said in describing what the Fed had done.
Policy makers, at their Jan. 28-29 meeting, said they would soon have to modify the year-old commitment, according to minutes released last week. The jobless rate fell to 6.6 percent last month, even as other indicators showed continued weakness in the labor market.
Responding to a question, Yellen said that “the unemployment rate is not a sufficient statistic for the state of the labor market. There is no hard and fast rule about what unemployment rate constitutes full employment, and we will need to consider a broad range of indicators.”
Senators also had a number of questions on bank supervision and regulation for Yellen, who succeeded Chairman Ben S. Bernanke on Feb. 3 after serving as his deputy.
In a concession rare for a Fed chairman in recent years, she agreed with a suggestion by Senator Elizabeth Warren of Massachusetts that the Fed change rules on how it handles enforcement actions.
Warren and Representative Elijah Cummings of Maryland, both Democrats, wrote Yellen Feb. 12 pointing out that the Fed Board had voted on only 11 of nearly 1,000 enforcement actions against banks in the last 10 years. Warren and Cummings requested that a board vote be required on consent orders that equal or exceed $1 million.
“I do think it is appropriate for us to make changes,” Yellen told Warren at the hearing.