WASHINGTON: Federal Reserve Chair Janet Yellen told lawmakers the central bank must press on with record monetary stimulus to combat persistent job-market weakness.
“There are mixed signals concerning the economy,” Yellen said in response to questions during testimony to the Senate Banking Committee on Tuesday. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates.”
While her “overall view is more positive,” Yellen said low wages are one sign of “significant slack” in labor markets, even after the jobless rate fell to an almost six-year low. In unusually emotive language for a central banker, she talked about the “psychological trauma” suffered by the unemployed and their families.
“She is a determined dove,” David M. Jones, president of Denver-based economic consulting firm DMJ Advisors LLC and a former Fed economist who has written four books on the central bank, said in a Bloomberg Radio interview. “She’s more worried about improving labor-market conditions, the long-term unemployed, flat wages, and other kinds of indications that there’s still considerable slack in the labor market. In her heart, that drives her decision.”
In prepared testimony, Yellen repeated that interest rates are likely to stay low for a “considerable period” after the Fed ends its asset-purchase program, which she said could happen following the October meeting.
“A high degree of monetary policy accommodation remains appropriate,” Yellen said in her semiannual testimony. “Although the economy continues to improve, the recovery is not yet complete.”
For an hour and 40 minutes, Yellen responded to senators’ questions on subjects ranging from bank oversight and asset-price bubbles to the housing market and the Fed’s bond-buying program, known as quantitative easing.
Sen. Sherrod Brown, D-Ohio, who has proposed legislation to shrink the biggest U.S. banks, asked about the human cost of unemployment.
“It takes such a toll on families and children,” Yellen said. “Anyone who ever talked to people experiencing significant unemployment realizes what the psychological toll is and the ways it affects their well-being and that of their community.”
While unemployment fell to 6.1 percent last month, some of the labor-market gauges watched by Yellen show continued weakness. The participation rate, which measures the share of working-age people in the labor force, was 62.8 percent last month, matching the lowest level since 1978. Among the unemployed, about a third have been out of work for six months or longer.
Even before the latest jobs report, Federal Open Market Committee participants raised their projections for the level of the main interest rate over the next two years, while continuing to predict that the first increase would occur next year.
Their median estimates, released last month, called for an increase to 1.13 percent at the end of 2015 and 2.5 percent a year later. In March, they estimated that the rate would rise to 1 percent by the end of next year and 2.25 percent at the end of 2016.