Yellen paints healthy pic­ture

Rais­ing rates, wind­ing down Fed’s bond port­fo­lio on cards

The Star Early Edition - - INTERNATIONAL - Howard Schneider

THE US ECON­OMY is healthy enough for the Fed to move for­ward with plans to raise rates and be­gin wind­ing down its mas­sive bond port­fo­lio, though low in­fla­tion and a low neu­tral rate may leave the cen­tral bank with di­min­ished lee­way, Fed chair­per­son Janet Yellen said yes­ter­day.

In what may be one of her last ap­pear­ances be­fore Congress, Yellen de­picted an econ­omy that, while grow­ing slowly, con­tin­ued to add jobs, ben­e­fited from steady house­hold con­sump­tion and a re­cent jump in busi­ness in­vest­ment, and was now be­ing sup­ported as well by stronger eco­nomic con­di­tions abroad.

The Fed “con­tin­ues to ex­pect that the evo­lu­tion of the econ­omy will war­rant grad­ual in­creases in the fed­eral funds rate over time,” Yellen said in her pre­pared tes­ti­mony.

Re­duc­tions in the Fed’s port­fo­lio of more than $4 tril­lion (R54.12trln) in se­cu­ri­ties are likely to be­gin “this year,” she said.

But she also noted that given cur­rent es­ti­mates, the fed­eral funds rate “would not have to rise all that much fur­ther” to reach a neu­tral level that nei­ther en­cour­ages nor dis­cour­ages eco­nomic ac­tiv­ity. The Fed still feels that the econ­omy needs loose, or ac­com­moda­tive, mon­e­tary pol­icy, so a lower neu­tral rate means the Fed may feel com­pelled to slow the pace of rate hikes down the road.

But for now, Yellen told mem­bers of the House Com­mit­tee on Fi­nan­cial Ser­vices that the econ­omy re­mains strong enough for the Fed to con­tinue its plans to grad­u­ally tighten pol­icy.

A ques­tion and an­swer ses­sion with leg­is­la­tors fol­lowed her pre­pared re­marks.

Yellen’s past ap­pear­ances be­fore the House panel have some­times in­volved sharp ex­changes with leg­is­la­tors who think the Fed’s in­flu­ence over the econ­omy has grown too strong, and who want pol­i­cy­mak­ers to be guided more closely by a math­e­mat­i­cal rule for set­ting in­ter­est rates.

In a re­port re­leased last week the Fed com­pared its cur­rent pol­icy to that pre­scribed by a va­ri­ety of such rules. It pointed out that the choice of a rule it­self in­volved judg­ments that would lead to vastly different out­comes.

Com­mit­tee chair­per­son Jeb Hen­sar­ling, an ad­vo­cate of “rules-based” mon­e­tary pol­icy, said in­clud­ing the rules dis­cus­sion in the semi-an­nual re­port was “very help­ful.”

Yellen, in her tes­ti­mony, re­ferred House leg­is­la­tors specif­i­cally to that sec­tion of the re­port. Her ap­pear­ance comes as the Trump ad­min­is­tra­tion mulls whether to re­place her when her term ends in Fe­bru­ary. Fol­low­ing her re­marks, US stocks rose while yields on Trea­sury bonds fell and the dol­lar de­clined against a bas­ket of cur­ren­cies.

Ac­cord­ing to her tes­ti­mony the econ­omy is on an even keel, near or be­yond full em­ploy­ment and the Fed is steadily mov­ing rates higher.

The re­duc­tion in the bal­ance sheet, which will be­gin slowly as the Fed rein­vests only a por­tion of the hold­ings that ma­ture each month, will mark the fi­nal exit from cri­sis-re­lated poli­cies.

One po­ten­tial is­sue is that the Fed may be ap­proach­ing a “neu­tral” rate, even as it hopes to con­tinue ac­com­mo­dat­ing the re­cov­ery.

Es­ti­mates of the in­fla­tion-ad­justed neu­tral rate have been fall­ing, and by some ac­counts may be near zero.

Yellen has said the Fed ex­pects es­ti­mates of the neu­tral rate to rise over time.

But un­less that hap­pens, or in­fla­tion picks up, the Fed may have only a few rate in­creases left be­fore it hits a level that is no longer felt to be en­cour­ag­ing spend­ing and in­vest­ment.


US Fed­eral Re­serve chair­per­son Janet Yellen yes­ter­day de­picted an econ­omy that, while grow­ing slowly, con­tin­ued to add jobs.

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