Yellen Says Extraordinary Support Needed for 'Some Time'

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The Asahi Shimbun via Getty ImagesFederal Reserve Chair Janet Yellen
By Jeff Kearns
and Craig Torres


Federal Reserve Chair Janet Yellen, easing investor concern that interest rates may rise earlier than previously forecast, said the world's biggest economy will need Fed stimulus for "some time."

Yellen said Monday the Fed hasn't done enough to combat unemployment even after holding interest rates near zero for more than five years and pumping up its balance sheet to $4.23 trillion with bond purchases.

"This extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy makers," Yellen said at a community development conference in Chicago. "The scars from the Great Recession remain, and reaching our goals will take time."

Yellen spotlighted as evidence "real people behind the statistics," describing how one person, Vicki Lira, lost two jobs, endured homelessness and now serves food samples part-time at a grocery store.

Stocks rose as Yellen underscored the Fed's commitment to spur the economy and put 10.5 million unemployed Americans back to work. Share prices fell on March 19, when she said in a press conference that the Fed might start raising the benchmark interest rate above zero about six months after ending its bond purchase program. Yellen didn't mention a timetable Monday.

"It is an indirect pushback," said Ward McCarthy, chief financial economist at Jefferies in New York. "I don't think she could directly contradict what she said at the press conference, so she did the next best thing, which was to paint a picture of a Fed that is going to be accommodative for a long, long time."

Fed Policy

The Standard & Poor's 500 index (^GPSC) rose 0.8 percent to 1,873.00 at 2:47 p.m. in New York. The yield on two-year Treasury notes, %VIRTUAL-article-sponsoredlinks%which are sensitive to changes in Fed policy, fell two basis points, or 0.02 percentage point, to 0.43 percent.

Large numbers of partly unemployed workers, stagnant wages, lower labor-force participation and longer periods of joblessness show that "there remains considerable slack in the economy and the labor market," Yellen said.

Monday's speech shows Yellen is inclined to press on with accommodation to boost employment because she focused on slack in the labor market and didn't mention economic growth or "more hawkish themes" such as the risks from record easing, said Thomas Costerg, an economist at Standard Chartered in New York.

"It was dovish and Yellen-esque, but she didn't explicitly backpedal on the six months comment so that's a ghost that will stay in the background," Costerg said. "She didn't explicitly say 'Oh, I made a mistake,' she just stressed the other way, that we need accommodative policy for some time."

Economic Performance

At her press conference last month, Yellen emphasized that the timing for an increase in the main interest rate hinges on economic performance.

The FOMC needs "to see where the labor market is," she said on March 19, adding that if inflation "is persistently below" the central bank's 2 percent goal, "that is a very good reason to hold the funds rate at its present range for longer."

Inflation decelerated to a 0.9 percent 12-month pace in February from 1.2 percent in January and has been below the Fed's 2 percent target for almost two years.

Yellen's speech Monday included references to "slack," a term also used recently by Bank of England Governor Mark Carney to underscore a pledge to keep interest rates at a record low.

Spare Capacity

The Fed, which this month dropped its link between low interest rates and a specific unemployment rate, followed a similar move by U.K. policy makers, who in February tied their outlook for borrowing costs to spare capacity in the labor market and other more qualitative measures.

"There remains scope to absorb slack further" before raising rates, the BOE said in its quarterly Inflation Report.

Yellen, 67, has focused on the labor market and the human cost of unemployment for much of her career as an academic and central bank official. Monday she described two other individuals from the Chicago area along with Lira, saying they "shared their personal stories with me."

Dorine Poole lost a claims-processing job and struggled to find work after two years of unemployment, while Jermaine Brownlee, a plumber and construction worker, "scrambled for odd jobs and temporary work" and still makes less than before the recession, Yellen said.

"They are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives," Yellen said. "Their experiences show some of the uniquely challenging and lasting effects of the Great Recession."

Full Time

Yellen was also clear about what labor-market indicators she is watching aside from the unemployment rate. She mentioned that 7 million people working part-time want to work full time, a share of the work force that is "very high historically."

The Fed chief said low numbers of people are quitting jobs "because they worry that it will be hard to find another," adding that gains in labor compensation have been "very low."

The FOMC has kept the benchmark interest rate near zero since December 2008 and sought to cut borrowing costs and fuel growth through bond buying that has more than quadrupled its assets to $4.23 trillion.

While policy makers have slowed the pace of their monthly asset purchases over the past three gatherings to $55 billion from $85 billion, Yellen said the central bank's "commitment is strong" to helping sustain progress in the job market.

Recent Progress

"Recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly," she said. "Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come."

The FOMC said in a policy statement this month that rates will likely remain low for a considerable time after the bond buying program ends. The committee said it will weigh a "wide range of information," including labor-market measures, in deciding when it will eventually begin raising rates.

Unemployment was 6.7 percent in February, up from the 6.6 percent level in January that was the lowest since October 2008. The economy added 175,000 jobs in February, more than economists projected, following the weakest two-month hiring gain in more than a year in December and January.

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Yellen Says Extraordinary Support Needed for 'Some Time'
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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