Yellen: Recovery Incomplete, Loose-Money Policy Justified

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Susan Walsh/APFederal Reserve Chair Janet Yellen
By Howard Schneider and Michael Flaherty

WASHINGTON -- The U.S. economic recovery remains incomplete, with a still-ailing job market and stagnant wages justifying loose monetary policy for the foreseeable future, Federal Reserve Chair Janet Yellen told a Senate committee Tuesday.

In a strong defense of the central bank's current stance, Yellen said early signs of a pickup in inflation aren't enough for the Fed to accelerate its plans for raising interest rates, a move currently expected in the middle of next year.

That could change, with interest rates rising sooner and faster, if data show labor markets improving more quickly than expected, she said.

But as it stands, "although the economy continues to improve, the recovery is not yet complete," Yellen said in semi-annual testimony before the Senate Banking Committee, repeating her focus on lagging labor force participation and weak wage growth as key to any conclusions about the economy's health.

"Too many Americans remain unemployed," Yellen said.

U.S. stock markets dropped slightly after the release of Yellen's testimony and an accompanying monetary policy report, with shares of biotechnology and social media stocks being particularly hard hit after being singled out in the report for their "stretched" valuations.

"These are the sub-industries that have caused a lot of longtime stock watchers to scratch their heads. These companies have relative few earnings, especially in the biotech area," said Kim Forrest, senior equity research analyst with Fort Pitt Capital Group in Pittsburgh.

"I hope she [Yellen] is not surprised by what the market is doing. I'd say she'd like to deflate these bubbles with a little bit of stock talk."

In general, however, the report said current asset and security prices remain in line with "historic norms."

Fed Relatively Upbeat

Yellen presented a broad overview of an economy still in transition from the 2007-2009 economic crisis. In the accompanying report, the Fed said its balance sheet would top out at $4.5 trillion when its bond-buying program ends in October, a sign of how much stimulus the central bank has had to unleash to support the economy.

With another $2.6 trillion held in reserve by banks, the report said it "will not be feasible" for the Fed to rely on the traditional Fed Funds market to manage interest rates -- a judgment implicit in its recent work on new interest rate tools.

Yellen said the economy continues to generate jobs and steady growth, but she added that Fed policymakers currently expect their preferred measure of inflation to stand at between 1.5 percent and 1.75 percent for 2014, short of the central bank's 2 percent target.

The housing market remains weak, Yellen said, and business investment less than hoped.

Fed chiefs are mandated by law to report to Congress twice a year on monetary policy, and the hearing Tuesday was Yellen's second such appearance. Her first turned into a marathon grilling about her philosophy and views of the economy.

The Fed faces a complex agenda as it weans the U.S. economy from the massive stimulus programs put in place to fight the financial crisis.

Economic data has kept Fed policymakers relatively upbeat that the economy will make steady progress towards the central bank's goals.

But there is also the potential for serious division.

Some policymakers worry the Fed is falling behind the curve on rate hikes and that Yellen is taking too much of an impromptu approach to the interest rate decision.

In her prepared testimony, she held firm to her view that low labor force participation and other labor market statistics are evidence of slack that needs to be absorbed by stronger job growth, not just a sign of unavoidable demographic change.

For now, a more dovish approach holds sway at the central bank, with several officials saying they'd tolerate inflation higher than the 2 percent target for a period of time in order to ensure growth is on track, wages are rising, and as many workers as possible have been drawn back into jobs.

Responding to questions from committee members, she said it would be a "mistake" for the Fed to adopt a strict rule for raising interest rates, something advocated by some lawmakers and Fed officials.

-Additional reporting by Rodrigo Campos in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Yellen: Recovery Incomplete, Loose-Money Policy Justified
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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