2/11/2014

FRB: Testimony--Yellen, Semiannual Monetary Policy Report to the Congress--February 11, 2014
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CongressionalHearing Transcripts Hearingtranscriptsare postedtothiswebsiteasthey becomeavailable.

ChairJanetL.Yellen
SemiannualMonetaryPolicyReporttotheCongress
BeforetheCommitteeonFinancialServices,U.S.HouseofRepresentatives,Washington,D.C.

February11,2014
ChairmanHensarling,RankingMemberWatersandothermembersoftheCommittee,Iampleasedtopresentthe FederalReserve'ssemiannualMonetaryPolicyReporttotheCongress.Inmyremarkstoday,Iwilldiscussthecurrent economicsituationandoutlookbeforeturningtomonetarypolicy.Iwillconcludewithanupdateonourcontinuingwork onregulatoryreform. First,letmeacknowledgetheimportantcontributionsofChairmanBernanke.Hisleadershiphelpedmakeoureconomy andfinancialsystemstrongerandensuredthattheFederalReserveistransparentandaccountable.Ipledgeto continuethatwork. CurrentEconomicSituationandOutlook Theeconomicrecoverygainedgreatertractioninthesecondhalfoflastyear.Realgrossdomesticproduct(GDP)is currentlyestimatedtohaverisenatanaverageannualrateofmorethan31/2percentinthethirdandfourthquarters, upfroma13/4percentpaceinthefirsthalf.Thepickupineconomicactivityhasfueledfurtherprogressinthelabor market.About11/4millionjobshavebeenaddedtopayrollssincethepreviousMonetaryPolicyReportlastJuly,and 31/4millionhavebeenaddedsinceAugust2012,themonthbeforetheFederalReservebegananewroundofasset purchasestoaddmomentumtotherecovery.Theunemploymentratehasfallennearlyapercentagepointsincethe middleoflastyearand11/2percentagepointssincethebeginningofthecurrentassetpurchaseprogram. Nevertheless,therecoveryinthelabormarketisfarfromcomplete.Theunemploymentrateisstillwellabovelevels thatFederalOpenMarketCommittee(FOMC)participantsestimateisconsistentwithmaximumsustainable employment.Thoseoutofajobformorethansixmonthscontinuetomakeupanunusuallylargefractionofthe unemployed,andthenumberofpeoplewhoareworkingparttimebutwouldpreferafulltimejobremainsveryhigh. Theseobservationsunderscoretheimportanceofconsideringmorethantheunemploymentratewhenevaluatingthe conditionoftheU.S.labormarket. AmongthemajorcomponentsofGDP,householdandbusinessspendinggrowthsteppedupduringthesecondhalfof lastyear.Earlyin2013,growthinconsumerspendingwasrestrainedbychangesinfiscalpolicy.Asthisrestraint abatedduringthesecondhalfoftheyear,householdspendingaccelerated,supportedbyjobgainsandbyrisinghome valuesandequityprices.Similarly,growthinbusinessinvestmentstartedoffslowlylastyearbutthenpickedupduring thesecondhalf,reflectingimprovingsalesprospects,greaterconfidence,andstillfavorablefinancingconditions.In contrast,therecoveryinthehousingsectorslowedinthewakeoflastyear'sincreaseinmortgagerates. Inflationremainedlowastheeconomypickedupstrength,withboththeheadlineandcorepersonalconsumption expenditures,orPCE,priceindexesrisingonlyabout1percentlastyear,wellbelowtheFOMC's2percentobjectivefor inflationoverthelongerrun.Someoftherecentsoftnessreflectsfactorsthatseemlikelytoprovetransitory,including fallingpricesforcrudeoilanddeclinesinnonoilimportprices. MycolleaguesontheFOMCandIanticipatethateconomicactivityandemploymentwillexpandatamoderatepace thisyearandnext,theunemploymentratewillcontinuetodeclinetowarditslongerrunsustainablelevel,andinflation willmovebacktoward2percentovercomingyears.Wehavebeenwatchingcloselytherecentvolatilityinglobal financialmarkets.OursenseisthatatthisstagethesedevelopmentsdonotposeasubstantialrisktotheU.S. economicoutlook.Wewill,ofcourse,continuetomonitorthesituation. MonetaryPolicy Turningtomonetarypolicy,letmeemphasizethatIexpectagreatdealofcontinuityintheFOMC'sapproachto monetarypolicy.IservedontheCommitteeasweformulatedourcurrentpolicystrategyandIstronglysupportthat strategy,whichisdesignedtofulfilltheFederalReserve'sstatutorymandateofmaximumemploymentandprice stability. Priortothefinancialcrisis,theFOMCcarriedoutmonetarypolicybyadjustingitstargetforthefederalfundsrate.With thatratenearzerosincelate2008,wehavereliedontwolesstraditionaltoolsassetpurchasesandforwardguidance tohelptheeconomymovetowardmaximumemploymentandpricestability.Bothtoolsputdownwardpressureon longerterminterestratesandsupportassetprices.Inturn,thesemoreaccommodativefinancialconditionssupport consumerspending,businessinvestment,andhousingconstruction,addingimpetustotherecovery. OurcurrentprogramofassetpurchasesbeganinSeptember2012amidsignsthattherecoverywasweakeningand progressinthelabormarkethadslowed.TheCommitteesaidthatitwouldcontinuetheprogramuntiltherewasa

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FRB: Testimony--Yellen, Semiannual Monetary Policy Report to the Congress--February 11, 2014
substantialimprovementintheoutlookforthelabormarketinacontextofpricestability.Inmid2013,theCommittee indicatedthatifprogresstowarditsobjectivescontinuedasexpected,amoderationinthemonthlypaceofpurchases wouldlikelybecomeappropriatelaterintheyear.InDecember,theCommitteejudgedthatthecumulativeprogress towardmaximumemploymentandtheimprovementintheoutlookforlabormarketconditionswarrantedamodest reductioninthepaceofpurchases,from$45billionto$40billionpermonthoflongertermTreasurysecuritiesandfrom $40billionto$35billionpermonthofagencymortgagebackedsecurities.AtitsJanuarymeeting,theCommittee decidedtomakeadditionalreductionsofthesamemagnitude.IfincominginformationbroadlysupportstheCommittee's expectationofongoingimprovementinlabormarketconditionsandinflationmovingbacktowarditslongerrunobjective, theCommitteewilllikelyreducethepaceofassetpurchasesinfurthermeasuredstepsatfuturemeetings.Thatsaid, purchasesarenotonapresetcourse,andtheCommittee'sdecisionsabouttheirpacewillremaincontingentonits outlookforthelabormarketandinflationaswellasitsassessmentofthelikelyefficacyandcostsofsuchpurchases. TheCommitteehasemphasizedthatahighlyaccommodativepolicywillremainappropriateforaconsiderabletimeafter assetpurchasesend.Inaddition,theCommitteehassaidsinceDecember2012thatitexpectsthecurrentlowtarget rangeforthefederalfundsratetobeappropriateatleastaslongastheunemploymentrateremainsabove61/2 percent,inflationisprojectedtobenomorethanahalfpercentagepointaboveour2percentlongerrungoal,andlonger terminflationexpectationsremainwellanchored.Crossingoneofthesethresholdswillnotautomaticallypromptan increaseinthefederalfundsrate,butwillinsteadindicateonlythatithadbecomeappropriatefortheCommitteeto considerwhetherthebroadereconomicoutlookwouldjustifysuchanincrease.InDecemberoflastyearandagainthis January,theCommitteesaidthatitscurrentexpectationbasedonitsassessmentofabroadrangeofmeasuresof labormarketconditions,indicatorsofinflationpressuresandinflationexpectations,andreadingsonfinancial developmentsisthatitlikelywillbeappropriatetomaintainthecurrenttargetrangeforthefederalfundsratewellpast thetimethattheunemploymentratedeclinesbelow61/2percent,especiallyifprojectedinflationcontinuestorunbelow the2percentgoal.Iamcommittedtoachievingbothpartsofourdualmandate:helpingtheeconomyreturntofull employmentandreturninginflationto2percentwhileensuringthatitdoesnotrunpersistentlyaboveorbelowthatlevel. StrengtheningtheFinancialSystem Iwillfinishwithanupdateonprogressonregulatoryreformsandsupervisoryactionstostrengthenthefinancialsystem. InOctober,theFederalReserveBoardproposedaruletostrengthentheliquiditypositionsoflargeandinternationally activefinancialinstitutions.1Togetherwithotherfederalagencies,theBoardalsoissuedafinalruleimplementingthe Volckerrule,whichprohibitsbankingfirmsfromengaginginshorttermproprietarytradingofcertainfinancial instruments.2Onthesupervisoryfront,thenextroundofannualcapitalstresstestsofthelargest30bankholding companiesisunderway,andweexpecttoreportresultsinMarch. Regulatoryandsupervisoryactions,includingthosethatareleadingtosubstantialincreasesincapitalandliquidityin thebankingsector,aremakingourfinancialsystemmoreresilient.Still,importanttaskslieahead.Inthenearterm,we expecttofinalizetherulesimplementingenhancedprudentialstandardsmandatedbysection165oftheDoddFrank WallStreetReformandConsumerProtectionAct.Wealsoareworkingtofinalizetheproposedrulestrengtheningthe leverageratiostandardsforU.S.based,systemicallyimportantglobalbanks.Weexpecttoissueproposalsforarisk basedcapitalsurchargeforthosebanksaswellasforalongtermdebtrequirementtohelpensurethatthese organizationscanberesolved.Inaddition,weareworkingtoadvanceproposalsonmarginsfornonclearedderivatives, consistentwithanewglobalframework,andareevaluatingpossiblemeasurestoaddressfinancialstabilityrisks associatedwithshorttermwholesalefunding.Wewillcontinuetomonitorforemergingrisks,includingwatching carefullytoseeiftheregulatoryreformsworkasintended. Sincethefinancialcrisisandthedepthsoftherecession,substantialprogresshasbeenmadeinrestoringtheeconomy tohealthandinstrengtheningthefinancialsystem.Still,thereismoretodo.ToomanyAmericansremainunemployed, inflationremainsbelowourlongerrunobjective,andtheworkofmakingthefinancialsystemmorerobusthasnotyet beencompleted.Ilookforwardtoworkingwithmycolleaguesandmanyotherstocarryouttheimportantmissionyou havegiventheFederalReserve. Thankyou.Iwouldbepleasedtotakeyourquestions. 1.SeeBoardofGovernorsoftheFederalReserveSystem(2013),"FederalReserveBoardProposesRuleto StrengthenLiquidityPositionsofLargeFinancialInstitutions,"pressrelease,October24.Returntotext 2.SeeBoardofGovernorsoftheFederalReserveSystem,CommodityFuturesTradingCommission,FederalDeposit InsuranceCorporation,OfficeoftheComptrolleroftheCurrency,andSecuritiesandExchangeCommission(2013), "AgenciesIssueFinalRulesImplementingtheVolckerRule,"jointpressrelease,December10.Returntotext Returntotop

2014Testimony
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