Congress- WSJ's Hilsenrath
Feb 11 at 08:52
By Jon Hilsenrath
Janet Yellen tells the world to expect continuity in monetary policy in
her first report to Congress with her at the helm. Here are four quick
observations on her comments and on the report the Fed submitted to lawmakers:
JANET YELLEN DOESN'T MINCE WORDS: Ben Bernanke's semi-annual testimony to
Congress tended to range from eight to 12 pages of text. Janet Yellen clocks in
with her first testimony at a little more than five pages of text. Her comments
are direct in addressing pressing questions. Will she stick with the policies
Mr. Bernanke authored? "Let me emphasize that I expect a great deal of
continuity in the (Fed's) approach to monetary policy." Is she worried about
recent turmoil in emerging markets? "Our sense is that at this stage these
developments do not pose a substantial risk to the U.S. economic outlook." The
days of central bank obfuscation - mastered by former chairmen like Alan
Greenspan -- are clearly over.
JANET YELLEN IS A DOVE: We already knew this, but her testimony reinforces
the view that Janet Yellen is a dove - meaning she leans toward easy money
policies to address low inflation and high unemployment. Most notably, she is
very focused on the weak job market, which she turns to on page one of her
testimony. "The recovery in the labor market is far from complete," she says.
She is looking beyond a 6.6% jobless rate in making this assessment. "Those out
of a job for more than six months continue to make up an unusually large
fraction of the unemployed," she says, and "the number of people who are working
part-time but would prefer a full-time job remains very high."
ROADMAP FOR NEW FORWARD GUIDANCE, NO NEW THRESHOLDS: The Fed has been
debating whether and how to shift its forward guidance for short-term interest
rates. Since December 2012, officials have set two thresholds to guide their
thinking on rate hikes - a 6.5% unemployment rate and a 2.5% inflation rate.
Either one, officials said back in December 2012, would trigger a discussion
about hiking rates. But as the jobless rate has fallen, officials have lost
faith in that marker, in part because they think it masks broad pockets of
weakness in the labor market--such as people who have left the labor force and
the counts of unemployed--but might come back if the economy strengthens.
Officials have considered lowering the jobless rate threshold to some lower
level like 6%. Ms. Yellen makes no mention of this idea, strongly suggesting the
idea is going nowhere. Instead, she signals very clearly that once the jobless
rate hits 6.5%, the Fed is going to be looking at a broader range of indicators
in deciding when to start rate hikes. Remember, Janet Yellen doesn't mince
words: "These observations underscore the importance of considering more than
the unemployment rate when evaluating U.S. labor market conditions."
FED DOESN'T ACCEPT BLAME FOR LATEST EMERING MARKET SELLOFF: In a section
in its official report to Congress, the Fed accepts that talk of pulling back on
its bond-buying program last summer triggered stress in emerging markets. But
officials don't accept that the latest round of selling is due to the Fed. "
Rather, a few adverse development--including a weaker-than-expected reading on
Chinese manufacturing, a devaluation of the Argentine peso, and Turkey's
intervention to support its currency--triggered renewed turbulence" in emerging
markets," the Fed said. In her testimony, Ms. Yellen said this doesn't yet look
like a threat to the U.S. economy. But the Fed warns in its report that a number
of emerging markets "harbor significant economic and financial vulnerabilities."
An index of vulnerability presented in this report (Page 29) highlights Turkey,
Brazil, India, Indonesia and South Africa as among the most vulnerable.
HOUSEHOLD WEALTH: Fed officials are encouraged by improvements in
household wealth, particularly a recovery in the housing market. In its official
report to Congress (page 13), they note the share of households with negative
equity in their homes - meaning more debt than equity - has fallen to one in
eight, compared to one in four two years ago. This, in turn, could make the
Fed's low- interest rate policies more powerful. "Banks are more willing to
refinance mortgages when homeowners have positive equity," the report says.