It's official: Janet Yellen will not be issuing any saucy soundbites as chair of the Federal Reserve.
In her debut Congressional appearance since taking the helm of the world’s most powerful central bank earlier this month, Yellen honored the proud tradition of saying little of substance and resorting to circular talk when necessary to parry an impertinent question or two.
If Yellen made any micronews at all, it was her insistence that the Fed will continue to pull back from the monetary policy known as quantitative easing, which the Fed began doing in December. Back then, the Fed said it would reduce purchases of long-term bonds by about $10 billion per month, which would bring the program to an end by the second half of 2014 if it continued uninterrupted. Some investors felt the Fed might suspend the pullback, on account of two weak employment reports since then and a declining stock market.
“I was surprised that the pace of job creation was running under what I had anticipated,” Yellen said. But not so surprised that she wants to change the Fed’s course: “We have to be careful not to jump to conclusions in interpreting what those reports mean.” Conclusion: The pullback remains in place at least until Fed policymakers next meet in March.
Yellen also clarified how the Fed will decide when it’s time to raise short-term interest rates. Under Yellen’s predecessor, Ben Bernanke, the Fed said it would keep interest rates extremely low at least until the unemployment rate falls to 6.5%. Unemployment has fallen faster than expected, though, with the rate currently at 6.6%, which means it could fall below the Fed’s threshold within the next few months. Yellen explained the Fed must now consider “more than the unemployment rate when evaluating the condition of the U.S. labor market." That basically means the Fed will keep short-term rates where they are until 2015 at least, an investor-friendly stance markets were happy to hear. Stocks rose by about a full percentage point during the time Yellen was testifying.
Appealing to Main Street
Yellen also addressed several longstanding criticisms of the Fed, especially the way its policies tend to benefit big businesses and stock-market speculators while doing little to directly help Main Street America. In this regard, she may eclipse the professorial Bernanke in terms of the empathy she seems to feel toward ordinary struggling Americans.
Yellen sounded sympathetic, for instance, toward savers earning paltry returns on fixed-income investments. “Low interest rates are a tough one for retirees looking to earn income on investments like CDs and bank deposits,” she said. In an earnest monotone, Yellen explained that interest rates would be low even without Fed policy, because the economy is weak, and the best way for savers to enjoy higher rates in the future is for the Fed to stimulate the economy through low rates now.
Besides, she said, “in addition to saving, people care about work opportunities, opportunities for their kids, and lots of people have exposure to the stock market as well, either through a (401)k or a retirement plan.” Had she been sitting in your living room explaining that, she probably would have convinced you.
Yellen also addressed the lesser-seen problem of people who want a full-time job but can only find part-time work, which cuts sharply into household earnings and living standards for several million people struggling to stay in the middle class. “The number of people who are working part time but would prefer a full-time job remains very high,” she said, suggesting the Fed may pay more attention to the plight of part-timers and the long-term unemployed as it debates future policy.
If you're a recent college grad with a lot of student debt, the Fed chair feels your pain. "This is debt that will be with them for a long time," Yellen said. "It’s important they get a good return for the borrowing they’re doing. The burdens are very high and it’s important that the education students are getting pays a return."
Finally, Yellen voiced the view of many disgruntled Americans when she said, “The conditions facing the economy are extremely unusual. We face severe headwinds from the financial crisis.” That puts Yellen firmly on the side of people who feel the five-year recovery is spotty at best, and downright recessionary for some people. By contrast, some policymakers feel the economy is sufficiently strong to end stimulus programs and focus on other priorities, such as cutting government spending or paying down the national debt.
Yellen, of course, is known as a “dove” likely to err on the side of stimulating the economy rather than pulling back too soon, much as Bernanke was. So far, she’s given investors no reason to think she’ll deviate from the path Bernanke set the Fed on. But she also faces difficult challenges that may soon require some creative maneuvering, including a possible correction in a stock market that has already been volatile this year, turmoil in overseas markets and ongoing slack in the labor market.
Yellen may have a soft spot for Main Street — but helping them won’t be easy.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.